Eight sustainable investment strategies to consider

Updated: Friday, 19 April 2024

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 PwC’s Asset and Wealth Management Revolution 2022 report, ESG assets are projected to reach 21.5% of total global assets under management in less than five years – a 12.9% compound annual growth rate.

This shift has given rise to a variety of investment strategies that prioritise positive contributions to society and the planet, as well as financial growth. In this article, we explore eight sustainable investment strategies for you to consider.

1. ESG investing

ESG investing is a strategy that involves evaluating companies based on three key criteria: Environmental, Social, and Governance. You consider a company's impact on the environment, its treatment of employees and communities, and the effectiveness of its governance structure.

ESG strategies are gaining momentum as investors recognise the potential for long-term financial growth through sustainable business practices. According to AXA, an increasing amount of academic research is showing that the incorporation of ESG factors can potentially lead to better performance for both companies and their investors.

When weighing up options, savvy investors 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.

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.

3. Impact investing

Impact investing is often considered an extension of philanthropy.

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 2020 Annual Impact Investor Survey, from the Global Impact Investing Network, found that 88% of impact investors reported their investments ‘met or exceeded their financial 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 for the most significant results.

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 committed to social justice, 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.

5. Positive screening

Positive screening is a specific strategy within the realm of SRI. 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 committed to 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.

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 seeking advice from a Financial Adviser. They can provide insights, assess risk, and help you navigate the complexities of this strategy.

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, such as renewable energy or conservation. In return, you may make a profit as 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.

8. Low-carbon investing

Many consider global warming to be a systemic financial risk. This has led to an increased focus on investors assessing climate change threats to their assets. 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 over time.

Building a sustainable investment portfolio

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 collaborating with knowledgeable Financial Advisers with expertise in this area.

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