The different types of sustainable investments
Curious about sustainable investing? Explore eight strategies – from ESG to green bonds – with practical pros and cons to help you grow your money and invest with purpose.
This article is not advice. If you would like to receive advice on your savings and investments, consider speaking to a Financial Adviser.
In an era where Environmental, Social, and Governance (ESG) considerations are front and centre, investors are increasingly seeking sustainable and responsible ways to grow their wealth.
According to a Bloomberg Intelligence report, global ESG assets are on track to surpass $40 trillion by 2030.
Their growing popularity has given rise to a variety of investment strategies that prioritise positive contributions to society and the planet – as well as financial growth. But what is sustainable investing? And how does it impact your financial portfolio?
In this article, we explore eight different types of sustainable investments, including what they are, as well as their pros and cons.
What is sustainable investing?
Sustainable investing is about growing your money over the long-term, while supporting positive change in areas like climate action, social equity, and good governance. It involves choosing sustainable investments – such as ethical funds, green bonds, or low-carbon companies – that aim to deliver financial returns alongside environmental or social benefits.
Eight types of sustainable investments
Whether you're just starting out or looking to refine your strategy, understanding the different types of sustainable investments can help you make choices that match both your values and your goals.
1. ESG investing
ESG investing is a strategy that involves evaluating companies based on three key criteria: Environmental, Social, and Governance.
ESG strategies are gaining momentum as investors recognise the potential for long-term financial growth through sustainable business practices. An increasing amount of research is showing that the incorporation of ESG factors can lead to better financial performance for investors.
When weighing up options, look for companies that are transparent about their ESG practices and provide clear, comprehensive disclosures. Transparency is a key indicator of a commitment to accountability and responsible business practices.
| Pros | Cons |
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Companies with strong ESG practices are often better managed, which can mean more stable returns over time. |
ESG scores aren’t consistent – one fund might rate a company highly, while another doesn’t, which can cause confusion. |
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ESG funds can help reduce investment risk by avoiding businesses with poor track records or hidden liabilities. |
You may think you're investing sustainably, but some funds include companies with questionable practices (known as ‘greenwashing’). |
2. Ethical investing
Ethical investing focuses on aligning investments with personal values and beliefs. You choose funds or banks that reflect your ethical principles, and avoid those involved in activities or practices that are harmful.
While financial performance is important, ethical investing involves looking beyond traditional financial metrics. This includes evaluating a company's impact on society, including its contribution to things like community development, diversity and inclusion, and environmental sustainability.
Ethical investing often involves scrutinising the entire production process, to ensure it aligns with your values. It can be useful to assess how companies manage their supply chains. Companies with transparent and ethically managed supply chains may be more aligned with ethical investing principles.
| Pros | Cons |
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Ethical funds target high-growth sectors like renewable energy and fair trade, which can deliver strong returns. |
Avoiding whole industries (like oil or tobacco) may limit potential returns in certain market conditions. |
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You're backing companies that meet clear ethical standards – giving you more control over where your money goes. |
‘Ethical’ means different things to different funds, so you might end up holding investments that don’t match your values. |
3. Impact investing
Impact investing is designed to generate measurable social or environmental impact alongside a financial return – and is often seen as a values-driven alternative to traditional investing.
The primary goal of impact investing is to create a positive social and environmental impact while making money. Impact investors look for opportunities that help solve social or environmental issues. The focus is on achieving real and positive results, along with financial gains.
Impact investments cover a range of sectors, including education, healthcare, and renewable energy.
The latest report from the Global Impact Investing Network, found that 90% of investors said their investments were ‘in line’ or ‘outperformed’ their expectations.
Impact investing involves measuring the exact changes that happen because of an investor's money. This type of investment strategy is often aligned with the sustainability challenges included in the United Nations Sustainable Development Goals (SDGs). These goals can help you to identify where you can make a difference. Many investors use the SDGs as a guide to decide where to invest their money.
| Pros | Cons |
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Your money goes directly into solving real-world problems, in areas like healthcare or clean energy – sectors with long-term growth potential. |
It can be harder to measure whether the social or environmental impact is actually happening. |
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Many impact investments report strong financial returns, especially when aligned with global development goals. |
These investments can be less liquid, meaning your money might be tied up for longer. |
4. Socially responsible investing
Socially responsible investing (SRI) has a broader focus than impact investing.
The main goal of SRI is to align investments with ethical, social, and environmental values. SRI means not investing in companies or industries that are seen as harmful to society or the environment. The focus is on ethical screening and making investment choices that reflect certain values.
This might include avoiding investments with companies involved with addictive substances or activities, such as alcohol, gambling, and tobacco. Instead, the focus is on identifying companies actively working on social justice and environmental sustainability.
When considering where to invest as part of your SRI strategy, look for companies that measure and report their social impact. Some organisations provide detailed impact reports that quantify the positive effects of their activities on social issues.
| Pros | Cons |
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Helps you avoid industries that carry long-term financial risks, like fossil fuels or gambling. |
Cutting out entire sectors can leave you with fewer investment options, which may make your portfolio riskier. |
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Many SRI funds aim for balanced performance by combining ethical filters with solid financial analysis. |
SRI funds often focus on avoiding harm rather than finding the best-performing companies, which could limit your growth potential. |
5. Positive screening
While traditionally part of SRI, positive screening is now often seen as its own approach – focusing on selecting companies that lead in sustainability. Instead of excluding certain industries, positive screening focuses on including companies with positive ESG practices, such as using renewable energy or promoting diversity and inclusion in the workplace.
This proactive approach not only aligns investments with sustainability goals but also encourages companies to improve their ESG performance. By directing wealth toward businesses leading the way on responsible practices, positive screening becomes a driving force for change.
If you want to explore SRIs, it’s worth looking out for companies who have third-party certifications or endorsements relating to positive criteria. For example, B Corp and ISO 14001 for environmental management, or diversity and inclusion recognitions. This indicates a commitment to positive practices.
| Pros | Cons |
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Helps you invest in businesses already performing well on sustainability, which can mean fewer risks and better long-term potential. |
Fewer companies meet the strict criteria, so your choices may be more limited. |
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These companies often have strong leadership and forward planning – traits that can lead to steady growth. |
Highly rated companies are often already popular with investors, so you might pay a premium – which can reduce your chances of big future gains. |
6. Thematic investing
Thematic investing is a strategy that identifies long-term trends, or megatrends, shaped by macroeconomic, geopolitical, and technological changes. This lets you contribute to sectors that have the potential to experience large growth and shape the future. You can choose themes that align with your personal values, such as clean energy, sustainable technology, or social equality.
With this approach, it’s important to assess the longevity and sustainable considerations of the themes. Research and understand the categories you're considering, to reduce any risks and challenges. Diversification is key to managing risk. Investing too much in one theme, can leave your portfolio vulnerable to fluctuations within a particular sector.
If thematic investing seems complex – or if you’re unsure about certain themes – consider speaking with a Financial Adviser. They can provide insights, assess risk, and help you navigate the complexities of this strategy.
| Pros | Cons |
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Lets you back big, fast-growing trends like climate tech or social equality, which can lead to strong long-term gains. |
If the trend doesn’t take off as expected, your returns could suffer. |
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Offers a way to invest in something you believe in, while targeting sectors with strong future demand. |
Focusing on one theme can make your portfolio less balanced and more vulnerable to changes in that sector. |
7. Green bonds
Green bonds fund new and existing projects that provide environmental benefits, and contribute to a greener economy.
If you buy green bonds, you’re lending money to organisations committed to projects with positive environmental impacts, like renewable energy or conservation. In return, you earn interest and get back the money you originally invested when the bond matures.
To avoid greenwashing, look for green bonds that have certification from reputable third-party organisations, such as the Climate Bonds Initiative. Independent certifications give you peace of mind that the bonds meet certain environmental standards.
| Pros | Cons |
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Offers a steady return while funding environmental projects – ideal if you want lower-risk, purpose-driven investing. |
Green bonds often pay lower interest than regular bonds, which could affect your overall returns. |
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Often backed by governments or large institutions, which adds a layer of security. |
Not all green bonds are independently verified, so it’s important to check they’re genuinely eco-focused. |
8. Low-carbon investing
Global warming is considered to be a systemic financial risk. One strategy to manage this issue in your portfolio is low-carbon investing.
This approach involves investing in companies with lower carbon emissions, or those transitioning to a more sustainable and eco-friendly business model. Common approaches to this type of strategy include investing in companies that contribute to decarbonisation (such as renewable energy producers) and divesting from companies that own fossil-fuel reserves.
When considering where to invest, check whether the company has set clear emission reduction targets. Companies with ambitious and well-defined goals show a commitment to reducing their carbon impact.
| Pros | Cons |
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Reduces your exposure to industries that may lose value as climate regulations tighten. |
There’s no single standard for what counts as ‘low carbon,’ so funds may include companies that don’t fully match your expectations. |
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Puts your money behind cleaner industries that are expected to grow in the future. |
Some low-carbon sectors are still developing, which can mean more ups and downs in the short term. |
Build a better future with sustainable investments
By integrating sustainable strategies into your investment portfolio, you have the power to contribute to the wellbeing of the planet, as well as your own financial success.
Understanding the benefits and challenges of sustainable investing is essential to making informed decisions that align with your financial goals. If you’re committed to sustainable investing, consider speaking to a Financial Adviser with expertise in this area.
Grow your savings with purpose
If you’re not ready to invest in the stock market, sustainable principles can also guide your savings choices.
If you have money you want to grow for a better tomorrow, Flagstone can help. We have a variety of ethical banks to choose from on our cash deposit platform – including charities and Sharia.
With Flagstone, you can spread your cash between hundreds of accounts from more than 60 banks – all in one platform, with one login. So you can maximise your savings whilst staying aligned with your ethical principles.
See how much interest you could be earning on your savings.