Gary O’Brien

21 December 2020

Why green investing doesn’t have to mean sacrificing returns

Although many investors want their money to be a force for good, it can be difficult to shake off the long-held belief that green investing equals poor returns.

To that end, research that suggests many sustainable investments perform as well as, if not better, than their traditional counterparts may be a real source of comfort for anyone considering going green.

If you’re looking for ways to ensure your money has a positive impact on the planet, read on to discover everything you need to know about green investing. And why it doesn’t have to mean sacrificing investment returns.

What is ‘green’ investing?

There isn’t an industry-wide definition of green investing, but it generally means investing in shares or funds where the underlying businesses are mindful of the environment.

Some of these businesses may be actively looking for ways to make a positive impact on the planet – perhaps by developing new sources of renewable energy. Others may be trying to maintain high environmental standards in their business practices.

Green investing is often part of a wider type of investing called ‘responsible’ or ‘sustainable’ investing. Funds claiming to be responsible or sustainable will often focus on one or more environmental, social or governance factors, which is where the term ‘ESG investing’ comes from.

Going green is big business

Green investing has surged in popularity in recent years, as more governments, companies and individuals look for ways to reduce the effects of climate change on the planet.

Figures from the Investment Association reveal £7.1 billion was invested into responsible investment funds in the first three quarters of 2020, up from just £1.9 billion in the same period the previous year.

The coronavirus pandemic has been a major catalyst in encouraging people to look for ways to use their money as a force for good.

According to a survey by Aviva, 55% of investors said the pandemic has had an impact on their likelihood to consider ESG investments. The research found the main drivers for ESG investing were pollution, climate change, waste and recycling, and promoting animal welfare.

Many sustainable funds outperform their traditional peers

There’s a growing body of evidence that shows investing in sustainable funds can have a positive effect on investment returns.

Analysis by Morningstar found that over a ten-year period through 2019, 58.8% of surviving sustainable funds across seven categories beat their average traditional peer. In the US large-cap equity category, seven out of ten sustainable funds delivered higher returns than their average conventional counterpart.

“The above-50% success rates for surviving sustainable funds in most categories over multiple time periods indicate that investors taking the ESG route were less likely to miss out on returns than if they had invested in traditional funds,” the researchers said.

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Source: Morningstar

Other research backs up Morningstar’s findings. For example, a Harvard study found that companies with good ratings on sustainability issues most relevant to their industries significantly outperformed those with poor ratings.

Some of the arguments for going green are about managing long-term risks. According to Morningstar, they include:

  • Climate change increasing costs for insurers
  • Warmer oceans increasing the risk of hurricanes and subsequently causing property damage
  • Litigation from environmental damage, such as oil spills
  • Consumer preferences shifting towards environmentally friendly products
  • Greater regulation and higher taxes for less environmentally friendly companies.

Green investments carry risk

It’s important to realise that green investments carry risk just as any other type of investment does. Make sure you choose investments that suit your individual needs and goals, rather than simply searching for a fund with a ‘green’ or ‘sustainable’ label.

It’s also worth bearing in mind that even if a fund calls itself green, it won’t necessarily meet your own environmental standards.

As Adam Robbins, of Triodos Investment Management, says: “Investors need to be aware that many ‘shades of green’ exist in the ethical investment market and should use this knowledge to consciously decide the kinds of impact they want to make with their money.”

Get in touch

If you want to make sure your money isn’t being used to fund businesses with values you don’t like or you want to invest in businesses that work specifically to benefit the environment, we can help.

Ardent is a member of the Ethical Investment Association and the UK Sustainable Investment and Finance Association, so you can trust us to invest your money in a way that matches your beliefs.

For more information, email hello@ardentuk.com or call 01904 655330.

Please note

The value of your investment (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.

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