In the lead up to the election, the Labour government promised that they would focus on making the UK a “green energy superpower”. Keir Starmer took steps to achieve this immediately by announcing an end to the ban on new onshore wind projects.
This was in response to a ban that the Conservative government had previously introduced, which limited opportunities for renewable energy projects. Now, the ban is lifted, and Labour has promised to double onshore wind, triple solar power, and quadruple offshore wind by 2030.
This push for green energy could create more opportunities for “sustainable investments” – investments in companies or products that promote positive environmental or social change.
Speaking to Money Marketing, a sustainable investing analyst said: “This initiative promises fruitful returns for investors investing in renewable energy companies and funds as the market expands”.
Yet, you might be reluctant to engage with sustainable investing because you believe certain misconceptions about the sector.
1. Sustainable investments offer lower returns
Perhaps the most common myth that deters investors is that sustainable investments offer lower returns than traditional alternatives.
However, recent studies suggest that this isn’t the case, and the opposite may be true.
Kroll’s global study assessed companies based on their total stock returns – dividends plus capital appreciation – and their “environmental, social, and governance (ESG) scores” between 2013 and 2021.
Companies receive an ESG score based on their performance in three areas:
- Environmental – Does the company support good environmental practices? Businesses that produce a sustainable product such as renewable energy or recycling technology may score highly here. All companies, including those that don’t offer “green” products or services, will be assessed on their effect on the environment. Taking steps to reduce damage to the environment, such as managing waste effectively, will improve scores.
- Social – Does the business treat its staff, and the surrounding community in a responsible way? This may include paying employees fairly, upholding workers’ rights, and supporting charitable causes.
- Governance – Is the business governed in an ethical way? This may include considering diversity when appointing board members or filling senior roles and taking active steps to avoid conflicts of interest.
The Kroll study found that companies with high ESG scores saw average returns of 12.9% between 2013 and 2021, whilst companies with lower ESG scores only saw growth of 8.6% in the same period.
Naturally, past performance doesn’t guarantee future returns and your own returns will depend on the specific investments you choose.
However, these figures suggest that investing sustainably doesn’t mean that you’re likely to see lower returns. In some cases, you might even see higher growth than you would on traditional investments.
2. Sustainable investments carry more risk
Another common myth is that it’s harder to balance risk when investing sustainably. Often, this misconception arises because investors believe that they have a limited selection of green investments to choose from.
However, as social and environmental issues become more important, the sustainable investment market continues growing. According to Bloomberg, global ESG assets are set to total $40 billion by 2030.
There are many different investment options to choose from, including individual stocks and shares, ESG funds, and green bonds.
You’ll likely follow the same process for selecting investments and assessing the risks as you normally would, but you’ll also consider ESG scores as part of that process.
So, provided you do due diligence on your investments, there’s no reason you can’t build a sustainable portfolio that aligns with your goals and attitude to risk.
You may also benefit from professional advice, especially if you’re not confident about managing risk when investing.
3. Sustainable investing is all about the environment
You might assume that sustainable investing is all about protecting the environment, but that isn’t true.
Remember, “environmental” is only one of three aspects that contribute to a company’s ESG score. By investing in ESG stocks or funds, you’re also supporting companies that score well in the “social” and “governance” areas.
Additionally, “impact investing” has grown in popularity in recent years and this could offer a more direct way to contribute to change.
Impact investing differs from ESG investing. Instead of relying on scores and overall sustainability, you put your wealth into companies that are solving a specific issue. These issues don’t necessarily have to be environmental either.
For example, you might invest in a company that builds affordable housing for low-income families, or a business developing new technology to help the visually impaired.
As such, you can tailor your investments to support whichever causes are most important to you.
4. ESG scores are always a reliable measure of a company’s sustainability credentials
When you look at an ESG score, it may give you an understanding of how sustainable a certain investment is. However, it’s important that you do your own research before making any decisions.
This is because the sustainable investing sector has an issue with “greenwashing” – companies or funds claiming to be more sustainable than they really are.
For example, in May 2023, the Guardian reported that BlackRock, State Street and Legal & General collectively held £800 million worth of bonds issued by fossil fuel companies in their ESG funds.
Fortunately, the Financial Conduct Authority (FCA) has taken steps to address this problem. From 31 May 2024, all firms promoting “sustainability-related” products must give “fair, clear, and not misleading” information.
These new rules should hopefully help to address the greenwashing issue. Yet ESG scores aren’t completely reliable, so it’s important that you understand precisely what you’re investing in.
You may also benefit from professional advice as we can help you do due diligence and select investments that align with your ethical values as well as your financial goals and attitude to risk.
Get in touch
We can help you build a sustainable investment portfolio that furthers your financial goals.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.