ESG investments - can you balance investment goals & values?

September 23, 2022

Finding a balance between investment goals and your values

More people are considering their values when making investment decisions. If it’s something you’ve thought about, you may wonder if it’s compatible with your investment goals. But it is possible to consider both values and returns.

Environmental, Social, and Governance (ESG) investing considers issues across these three areas. For some investors, it can be a way to incorporate their values. This may include investing in companies that reduce carbon emissions, or have a strong human rights policy. ESG investing can cover many different areas and there are various strategies for making it part of an investment portfolio.  

The popularity of ESG investments are growing, even though the number of assets invested that match ESG criteria is still quite small. According to a survey from Tridos Bank, 8 in 10 investors now want or expect a fund manager to upskill in sustainability issues. 6 in 10 new investors go even further and think banks should only offer investment ISA products that are sustainable.

So, if it’s something you’re thinking about, can you balance your values with your investment goals?

ESG investments can out perform benchmarks

You may want to consider ESG issues but the financial return of your investment will still be a priority. The good news is figures suggest making your values part of your investment process doesn’t have to mean compromising on returns.

According to research published in FTAdviser, ESG portfolios and funds can out perform those that don’t consider ESG issues. The findings indicated the European high ESG portfolio out performed by about 12% a year. This fund contains the highest 10% of ESG-scoring stocks.

Nest Pensions ( the pension scheme set up by the government) also highlights that it is possible to balance values and returns. According to data, the Nest Ethical Fund delivered 39.9% returns cumulatively over the five years to March 2022. Compare this to the other two funds over the same period:

  • The Nest Higher Risk Fund delivered returns of 35%.
  • The Nest 2040 Retirement Date Fund delivered a return of 31%.

It’s important to remember that there is no guarantee for returns. All investments carry some risk and the value may fall.

How to balance ESG and your goals

1. Keep your risk profile in mind

Your risk profile is essential for making decisions that are appropriate for you. This should be top of the list whether you’re making ESG a part of your portfolio or not.

If an investment opportunity aligns with your values, it can be tempting to jump straight in. Even so, you need to consider what the risk is and how it fits into your wider financial plan. It can be tempting to jump in and invest in a company you believe has a positive effect. But you should try and take a more rational approach. This can help you balance investments that match your values with investments that deliver the returns you need to reach other goals.

If you’re not sure what level of risk is right for you and your circumstances, please contact us.

2. Invest with a long-term time frame

You should always invest with at least a five year time frame and this remains true when using ESG criteria. The longer you invest, the more likely it is that peaks and troughs will smooth out. While your portfolio is likely to fall in value at times, markets tend to deliver returns over the long term. Look at companies that are likely to perform well in the future when making investment decisions.

Companies that are ESG-focused are often looking at big picture issues. For example climate change or supply challenges. This long-term view could be beneficial to investors when you assess overall returns.

3. Be clear about your values

First of all, think about what's important to you. Don't include ESG investments until you've done this. You may need to be flexible. Valuable investment opportunities can be overlook if your list of criteria is lengthy. Being flexible or focusing on a few core issues can help you create a balance within your portfolio.

4. Your financial circumstances

You shouldn’t make investment decisions without looking at your wider financial circumstances. If you’re in a secure financial position, you may be able to take a greater amount of risk. this is because volatility is less likely to affect your lifestyle.

Best practice would mean you have an emergency fund in place before you invest. You can also consider things like financial protection, to secure your financial future.

Do you have questions about ESG investing?

Adding ESG criteria to your investment process can add a layer of complexity. Seeking professional advice can help you build a portfolio that balances many goals. Please contact us, we’re here to answer any questions you may have.

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 investment 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.

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