Understanding ethical and sustainable investing

Investing with intention

At Happy Planet Financial Planning I help people to invest with intention. That means I’ll help you to use your wealth to make a positive contribution in the ways that matter to you.

Making small changes to the way you spend and invest your money could have a far bigger impact than you realise. For example, did you know that making your pension green is 21x more powerful than giving up flying, going veggie and switching energy provider? *

Here are a few answers to questions I am often asked about what “investing with intention” means.



* Source: Make My Money Matter

Is there a difference between ethical and sustainable investments?

Broadly, yes, although they can overlap. Ethical investment tends to screen out unpopular sectors such as oil and gas (due to fossil fuel/climate change issues), armaments, gambling, tobacco and adult entertainment. They may also have other positive themes that select companies based on their ethicality in how they treat employees, suppliers, customers etc. Sustainable investments tend to be portfolios that are focused for the longer term on environmental/climate-friendly investments, for example, clean energy, water sanitisation etc.

Is ethical and sustainable investing “niche” or “experimental”?

No. Ten years ago, you’d have had a hard time finding an ethical or sustainable portfolio. However, as the issues of climate change, environmental deterioration, loss of biodiversity, poor employment practices, human rights breaches, and inequality have risen up the agenda, so too has the availability of ethical and sustainable funds. With almost all providers now offering products that seek to address these issues. Rather than being at the fringes of financial planning, such solutions are now at the heart of many investment propositions. In a recent YouGov Poll commissioned by UKSIF in September 2023, 69% of people said that they were not comfortable being invested in climate negative investments, and 69% said the same of socially negative investments.

Will I be sacrificing performance if I choose ethical and sustainable funds?

It’s a common misconception that there must be a financial sacrifice when you choose to invest sustainably. A growing body of research in this area shows this assumption to be false, however. It is not a zero-sum game with “principles vs performance”.

It’s important to first point out that investment returns are never guaranteed. As with any investment, you may not get back what you invest and past performance is no guarantee of future gains.

However, research has shown that companies with improving ESG credentials have on average outperformed by 14.4% in emerging markets and 5.2% in developed markets over five years against those with low ESG credentials (MSCI, 2018).

ESG investment funds have also been shown to be less volatile. During the coronavirus market downturn, ESG investors experienced lower volatility than standard investments with Fidelity International reporting the S&P 500 fell 26.9% on average between 19 February and 26 March 2020. By comparison, companies it rated “A” for ESG issues fell 23.1% during the same period. This resilience can be attributed to the ESG funds having more favourable long term prospects, and being some of the best governed companies, they had loyal employees, customers and suppliers, and a sound financial basis.

How will you invest my money?

I only ever make recommendations for investment after I have taken you through an extensive “discovery” process. I need to understand you, your financial circumstances, your vision and goals for your future and your appetite for and tolerance to risk on a deep level before I can begin to build an investment portfolio for you. Each investment solution is therefore tailored to each individual client’s needs and objectives.

However, the product I recommend most often is a discretionary Model Portfolio. This will have a risk-rated asset allocation, meaning that it will contain an amount of equity (risk) that is aligned to your Investment Risk Profile (IRP). It will also contain less risky asset classes such as fixed income bonds. As a “discretionary” portfolio, the discretionary fund managers who manage your portfolio will make the investment decisions without the need to ask for approvals from you. As well as being aligned to your IRP, I will ensure that your ethical and sustainable preferences are also reflected in the chosen portfolio.

How will you establish what my values are?

At the start of our journey together, you will be asked to complete a “Sustainable Investing Questionnaire”. You will be asked what you’re passionate about, whether you’re actively engaged in certain areas, or any areas you want to avoid, as well as causes you want to positively support and your priorities.

We will then discuss the results to ensure that your views on certain matters are fully understood. We will also discuss the principles of negative screening and stewardship (using shareholder voting rights) so you fully understand how your values are to be aligned with your investments.

I will then establish where on the scale between light green and dark green you fall. Light green may be not wishing your investments to be in negative sectors such as tobacco, alcohol, gambling, fossil fuels, arms and adult entertainment. Dark green refers to more active intentions, such as wanting to invest in companies that are trying to solve the world’s problems – renewable energies, for example, also innovative healthcare, social housing, recycling, or any company that seeks to provide a replacement technology that mitigates or eliminates an environmentally harmful product or service.

If your question isn’t answered here, please don’t hesitate to contact me, at emily@happyplanetfp.co.uk or 07786 854 048 so I can address your queries directly.