Table of Contents
Introduction
Investing in sustainable and ethical funds has recently become very popular especially among the generation that wants to align their money with their values. These funds do not only aim at achieving financial returns but also help the investor to align with companies that share their concern on environmental, social and governance issues. If you are new to this area, this handbook will provide some useful information and directions that will help you start investing.
Understanding Sustainable and Ethical Funds
Sustainable and ethical funds, also referred to as socially constrained funds or ESG funds, are investments that take into account the ESG factors in order to select investments. They aim to achieve a favorable social outcome in addition to the financial one, which makes them attractive for those who want to make a difference in the society.
The ESG factors include a number of aspects, such as climate change, human rights, labor standards, governance and others. By investing in these funds you are actually supporting those companies that pay attention to social responsibility and thus contribute to the improvement of the society.
Why Invest in Sustainable and Ethical Funds?
Here are several great reasons to consider adding sustainable and ethical funds to your investment strategy:
- Alignment with values: It is possible to invest in companies that you would want to support, and in the processes that are important to you, such as renewable energy, gender equality or fair labour practices.
- Long-term performance: Many studies show that companies with high levels of ESG performance tend to outperform their peers in the long run. You may gain financial growth as well as contribute to the positive change in the society.
- Risk management: Those companies that embrace ESG factors are likely to be better at managing risks that are related to environmental and social factors, thus reducing your exposure to such risks.
- Regulatory trends: Sustainability is increasingly becoming important, and investing in ethical funds could put you in a good position to take advantage of the changes in laws and society, being ready for the future.
How to Start Investing in Sustainable and Ethical Funds
If you are ready to invest in sustainable and ethical funds, then do the following:
1. Identify Your Beliefs and Goals
First of all, try to determine those issues that are most important to you and what causes you want to support. This will help to inform your investment decisions on whether to focus on particular industries or more general sustainability themes.
2. Find out More About Sustainable and Ethical Funds
Explore different funds that are currently available in the market. Look for those that are most relevant to your values and have a good track of record in terms of ESG integration. It is also important to focus on the performance, fees and the experience of the fund manager.
3. Assess Fund Performance
Even though sustainability is important, you should also find out the financial results of your chosen funds. You should then determine the funds that have given good returns in the short term and the long term and how they compare with other funds.
4. Review Fund Fees
Fees can really eat into your investment returns. When reviewing the funds, check the expense ratio and other fees that may apply to ensure they are not high.
5. Divide Your Assets
Diversity is key! Create a mix of sustainable and ethical funds to help mitigate the risks of any single fund by spreading your investment across sectors and asset types.
6. Track and Update Your Investments
Once you have invested, it is recommended to keep a close eye on your funds. It is important to know the performance, investment policies and market trends of the instruments you have chosen – you should also ask your financial advisor whether your strategy is appropriate for the set goals.
Case Study: The Rise of ESG Investing
A good example of the increase in sustainable and ethical investing can be observed in the growth of ESG funds in Europe. For instance, a Morningstar report showed that European ESG funds received a net inflow of €120 billion in 2020, more than twice the amount received in the previous year.
This increase can be attributed to the increased concern with sustainability issues, the promotion of sustainable investing by regulations and the demand of investors for more sustainable and transparent investment options. Moreover, the report showed that 57% of sustainable equity funds in Europe outperformed their conventional peers in 2020.
Summary
Investing in sustainable and ethical funds offers you an opportunity to make your portfolio reflect your values while also potentially earning profits. It is, therefore, important to identify your goals, compare the options, review the returns and costs, diversify your portfolio, and make regular monitoring of your investments as you start investing in sustainable and ethical funds.
This is a long-term commitment. Please remain active, pivot when the market shifts, and regularly update your investments to reflect your values. It is, therefore, possible to achieve a positive impact while also growing our financial assets.
