Sustainable and ESG investing

Toby: So, Tom, let’s start at the top. What exactly is sustainable investing?

Tom: Well, Toby, sustainable investing, simply put, involves investing your money with an awareness of its wider impact. It’s often referred to as ESG investing, which stands for Environmental, Social and Governance investing. Obviously that’s a bit of jargon but it’s also a helpful way of looking at this topic - how the companies that you invest in stack up against those Environmental, Social and Governance measures.

Toby: Ok. So it’s a bit more of a mindful approach to investing. Now that sounds like a noble pursuit, but investors may be wondering - why exactly should I care? For them, investing is all about returns, not society, right?

Tom: Well yes and no. I think, generally speaking, people are considering the wider impact of their investments far than they were before. Just as we’re all a bit more aware generally of our impact on society and the environment. But you’re right, some people do worry that sustainable investing will have a negative impact on their returns. They think doing good comes at a cost. We actually think that the reality is quite the opposite.

Our analysis shows that, companies that boast strong ESG credentials outperform those that don’t. This was particularly true last year during the worst of the pandemic. There are a couple of reasons for this. The first is that being a good ESG company is a kind of proxy for just being a good company, full stop. It’s no surprise that companies that are socially responsible, diligent about corporate governance, and environmentally friendly tend to be the sort of high quality, well-managed companies that we all want to invest in.

The second is that sustainability is itself a good, long-term investment trend. The environment, for example, is high on everyone’s agenda right now. Companies that can provide solutions to the environmental crisis are likely to be good ones to invest in if you’re looking for long-term growth. They’re sustainable in two senses - socially and financially.

Toby: OK understood. So how do investors get in on this? Are there different ways to invest sustainably?

Tom: Yes, there are. At one extreme, you have funds that avoid certain activities or industries. Some, for instance, avoid oil or tobacco companies. Others see it as a more proactive thing - making a positive difference. Not just ‘do no evil’ but be a force for change. That’s true of the climate-focussed funds we were talking about earlier, for example. Another approach is to look for the companies in each sector with the strongest sustainability credentials - best in class, if you like. I think of sustainability as a spectrum. Wherever you fall along it, there’s likely to be a fund to suit your needs.

Toby: Tom, that’s really interesting. If you want to know more about sustainable investing, you can visit our sustainable investing hub page at fidelity.co.uk/sustainable where you'll find our ESG fund categorisation tool as well as all the latest Fidelity insights.

ESG is an acronym for the three central factors used by responsible investors to screen and select companies and other investments for their portfolios. You’ll find that the terms ‘environmental’ and ‘social’ may sometimes be replaced by ‘ethical’ and ‘sustainable’. Using ESG factors does not automatically mean a fund or investment portfolio is ‘sustainable’ or ‘ethical’, so you should always do your research first. Examples of what ESG factors cover vary but they can include climate change, health and safety in the working environment and protecting the interests of shareholders.

Choosing investments that avoid dealing with products and services that may be considered harmful or misalign with personal values, such as tobacco, adult entertainment and gambling. Many ethical funds will also screen for a wide range of environmental issues such as deforestation or negative social issues such as low labour standards.

Impact investors aim to generate positive, measurable influences on society and/or the environment, alongside a financial return. Some of the areas impact investing might aim to challenge include traditional (ie non-renewable) power generation and gender inequality. Impact investing can be associated with lower financial returns, though this is not always the case. There is some evidence that scoring highly on ESG factors can be associated with better investment returns.

This is an alternative term for a range of investment approaches including responsible, sustainable or ethical investing. It usually means that ESG factors and values have been integrated into the investment process. Some examples may include human rights and environmental sustainability.

An investment approach that considers environmental, social and corporate governance (ESG) factors, with a focus on companies seeking to improve wellbeing and have a positive impact on society and the physical environment.