As the new year approaches, you might be thinking about your investment strategy and whether you need to make any changes in 2024.
In the past few years, environmental, social and governance (ESG) investments have grown in popularity as they reflect the ethical concerns of investors.
These investments consider three important factors:
- Environmental – How do a company’s operations affect the environment and what measures do they take to reduce this? This could include systems for managing waste or using renewable energy, for example.
- Social – What do the company’s relationships with their employees and other businesses look like? Issues such as treatment of their employees, health and safety standards, or charity work are important here.
- Governance – Is the company run in an ethical manner? This often focuses on behaviour at the board level including the transparency of their accounting and what their tax position is.
By choosing ESG investments, you can better align your wealth with your morals.
Yet, some investors have turned their back on ESG options in recent months. According to the Financial Times, “responsible funds” reported a record outflow of £544 million in September 2023.
As such, you may be wondering whether ESG investing is a reliable long-term option, or if those taking their money out of sustainable investments are making a sensible decision.
Read on to learn more about whether ESG investments are still worth pursuing in 2024.
ESG investments can support your ethical priorities
When making decisions about your investments, it is important to consider the potential growth you can achieve. Often, if an investment is unlikely to generate the returns you need to meet your financial goals, it is probably not suitable for your financial plan.
That said, you may want to consider your ethical priorities too.
If you are concerned about climate change, for instance, you may make simple changes such as driving less or cutting your energy use at home. Yet, if you still invest your wealth in companies that produce significant emissions, you may counteract your hard work.
Fortunately, your financial plan may better support your ethical priorities if you focus on ESG investments.
So, if environmental and social responsibility are important to you, ESG investments could be worth pursuing in the coming years, even if the returns are slightly lower than other investments.
The good news is the data shows that the growth you see on ESG investments could well match the returns on traditional investments.
Sustainable investments may offer competitive returns
Some people believe that ESG investing requires a sacrifice – your investments may be more ethical, but you must accept lower returns as a result.
Yet, that may not be the case. In fact, research reported by FTAdviser compared six exchange-traded funds (ETFs) – five with an ESG overlay and one without. It found that there was no discernible difference in the returns between ESG and non-ESG funds.
In some instances, ESG investments may even perform better than the alternatives. For instance, the Sustainable Reality Report published by the Morgan Stanley Institute for Sustainable Investing compared the performance of a wide range of different funds.
The findings showed that in the first half of 2023, sustainable funds generated growth of 6.9%, compared with just 3.8% from traditional funds.
It’s important to note that past returns do not guarantee future performance and the value of your investments could go down.
Still, the current data suggests that fears about poor returns may be unfounded. Also, it’s worth remembering that social and environmental concerns are a priority for an increasing number of people.
As a result, companies that focus on operating in a more ethical way could be more likely to find success in the future.
It is important to be cautious about “greenwashing”
ESG investments could be worth pursuing in 2024 and beyond because they may offer competitive returns and might support your wider ethical goals.
However, you may need to be cautious about “greenwashing” – companies presenting themselves as sustainable despite the fact their business practices do not reflect this.
Investors can be caught out by greenwashing and find that their wealth is supporting practices that they don’t agree with, despite their belief they are investing in ESG-friendly products. For example, in May 2023, the Guardian reported that 160 funds claiming to be “green” held $4.6 billion in oil and gas companies.
The potential for greenwashing may contribute to fears about the reliability of ESG investing. Consequently, it’s important to do your research and ensure that any investments you make are in line with your personal values.
Fortunately, that may be easier in the future as the Financial Conduct Authority (FCA) plans to introduce more stringent regulations. According to Reuters, the FCA will soon require all labelling to be “fair, clear, and not misleading” and the regulator will have the power to take action against firms who do not adhere to this.
Hopefully, this might reduce the risk of greenwashing in the future, so you can be more confident that your ESG investments align with your values in 2024 and beyond.
Get in touch
We specialise in ESG investments, so we can give you the guidance you need.
Please contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2023 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
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.
