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ESG: Can you balance your values with your investment goals?

Published: September 1, 2022 by Jennifer Armstrong

More people are considering their values when making investment decisions. If it’s something you’ve thought about, you may wonder if it’s compatible with your investment goals. But it is possible to consider both values and returns.

Environmental, Social, and Governance (ESG) investing considers issues across these three areas when investing, as well as financial information. For some investors, it can be a way to incorporate their values. This may include investing in companies that reduce carbon emissions or have a strong human rights policy. 

ESG investing can cover many different areas and there are various strategies for making it part of an investment portfolio. 

While the number of assets invested with ESG criteria in mind is still relatively small, their popularity is growing.

According to a survey from Tridos Bank, 8 in 10 investors now want or expect a fund manager to upskill in sustainability issues. 6 in 10 new investors go even further and think banks should only offer investment ISA products that are sustainable. 

So, if it’s something you’re thinking about, can you balance your values with your investment goals? 

ESG investments can outperform benchmarks

While you may want to consider ESG issues, it’s understandable that the financial return is still a priority when you invest. 

The good news is figures suggest that making your values part of your investment process doesn’t have to mean compromising on returns. 

According to research published in FTAdviser, ESG portfolios and funds can outperform those that don’t consider ESG issues.

The findings indicated that the European high ESG portfolio, which contains the highest 10% of ESG-scoring stocks, outperformed by about 12% a year.

The pension scheme set up by the government, Nest Pensions also highlights that it is possible to balance values and returns.

According to data, the Nest Ethical Fund delivered 39.9% returns cumulatively over the five years to March 2022. In comparison, the Nest Higher Risk Fund delivered returns of 35% and the Nest 2040 Retirement Date Fund delivered a return of 31% during the same period. 

It’s important to remember that returns cannot be guaranteed. All investments carry some risk and the value may fall. 

How to balance ESG and your goals

1. Keep your risk profile in mind

Whether you’re making ESG a part of your portfolio or not, your risk profile is essential for making decisions that are appropriate for you. 

Even if an investment opportunity aligns with your values, you need to consider what the risk is and how it fits into your wider financial plan. While it can be tempting to invest in a company that you believe is having a positive effect, try and look at the opportunity logically. 

This can help you strike a balance between investments that match your values and delivering the returns you want to achieve to reach other goals. 

If you’re not sure what level of risk is right for you and your circumstances, please contact us. 

2. Invest with a long-term time frame

You should always invest with a minimum time frame of five years, and this remains true when using ESG criteria.

The longer you invest, the more likely it is that peaks and troughs will smooth out. While your portfolio is likely to fall in value at times, historically, markets have delivered returns over the long term. When you’re making investment decisions, looking at companies that are likely to perform well in the years to come makes sense.

Companies that are ESG-focused are often looking at big picture issues, such as climate change or supply challenges. This long-term view could be beneficial to investors when you assess returns overall. 

3. Be clear about your values

Before you start incorporating ESG into your investments, it’s a good idea to spend some time thinking about what is important to you. 

However, you may need to be flexible. If you have a long list of ESG criteria, you could exclude many investment opportunities because they don’t tick all your boxes. Being flexible or focusing on a few core issues can help you create a balance within your portfolio. 

Do you have questions about ESG investing?

Adding ESG criteria to your investment process can add a layer of complexity. Seeking professional advice can help you build a portfolio that balances multiple goals. Please contact us, we’re here to answer any questions you may have. 

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 investment 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.


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