Sustainable investing

Time to read: 7 minutes

With today’s media eye on climate change and plastic pollution, it’s impossible to ignore the impact we’re having on our planet. So if you’re someone who wants to make a positive difference, you might be interested to know how you, your money and the things you care about could all benefit from sustainable investing.

 

According to a recent UN report1, the world’s population is growing at a rate of around 83 million people every year. By 2050, there will be 9.8 billion people in the world, and 2.3 billion of us will be over 65. More of us are living longer. Which means more of our future selves will be affected by the way our nations are run, the state of our environment and the wellbeing of the people in it.

And this is where it gets personal.

You, as an individual, can have an impact on what that future looks like by investing your money into a better world. Sustainable choices give you that positive power.

Whatever matters to you most – be it gender equality, animal welfare or environmental pollution – it’s perfectly possible to invest with a conscience and make a profit at the same time. 

A rising trend

Sustainable investing is in no way niche. Over the last decade, sustainability has become increasingly important in the investment world. More and more investors now want to know where their money is going and what it’s being used for. They believe it’s important to know that their investments are comfortably aligned with their values.

In response, more and more governments, corporations and investors are adopting the principles of sustainable investing. In effect, increasing demand is driving the mass growth of these types of investments.

The numbers say it all. There is now more than $21.4 trillion invested sustainably in global assets, with $13 trillion of this in Europe alone2.

Even closer to home, we can see that more than half of UK investors have increased their sustainable investments over the past five years. This includes over 85% of people aged 18 to 36, who consider sustainable investing as being important to them3.

Sustainable names are not the same

So we’ve established that sustainable investing is a good thing and it’s already mainstream. But what exactly is sustainable investing? The challenge is, there’s no industry-standard definition which means it can mean different things to different people.

When we talk about sustainable investing at HSBC, we mean the aim to generate long-term financial returns while contributing positively to society.

As well as sustainable investing, you’ll come across lots of other different terms. There’s ethical investing, environmental, social and governance (ESG) investing, impact investing, socially responsible investing (SRI), values-based investing, conscious investing and green investing.

While they broadly mean the same, there are some key differences in the way they work which are important to know before you choose how to invest.

Let’s take a closer look at some of the main approaches and what they involve.

  1. Ethical investing
    Ethical investing actively avoids companies or industries that have a negative impact on society and the environment. This is called negative screening. You can expect sectors such as tobacco, animal testing, gambling and oil & gas to be excluded from this type of investing.
  2. Sustainable investing
    Sustainable investing actively selects companies that have a positive impact on the world. This could be anything from green technology to social initiatives in developing countries. It’s less restrictive than ethical investing as it allows for the fact that companies are often neither all good or all bad – such as oil companies that invest in clean energy.
  3. Impact investing
    Impact investing actively selects companies whose positive impact on the world can be measured. This can be anything from generating a specific amount of recycling or saving a certain amount of water.

Sustainable investing using ESG principles

If you’re looking for an even broader approach that allows you to invest with a conscience and with fewer restrictions, you might want to consider sustainable investing that uses ESG principles.

ESG is a recognised way of measuring the sustainability of companies from not just one ethical perspective, but 3 – environmental, social and governance. As well as calculating the level of sustainability today, ESG scoring can also help work out how big a part environmental, social and governance principles will play in company’s long-term performance. You could say it’s helping to future-proof your investment.

So what issues are included in ESG and are they things that matter to you? Here’s an example of some of the things that are considered:

Environmental

How companies are making an impact on the environment:

  • Climate change impact
  • Air & water pollution
  • Waste management
  • Energy efficiency
  • Water scarcity 
Social

How companies engage with and impact on their employees, clients and communities:

  • Human rights 
  • Consumer privacy 
  • Gender equality 
  • Data security 
  • Health & safety 
Governance

How companies are governed or managed:

  • Board structure 
  • Company ownership 
  • Financial reporting 
  • Business ethics & culture 
  • Executive remuneration

Principles can equal profits

The good news is, ESG investing doesn’t mean you have to sacrifice your financial returns - it can literally pay to have principles. And there’s growing evidence to support this.

A Harvard study found that companies with good ratings on sustainability issues most relevant to their industries, significantly outperformed companies with poor ratings on these issues4.

The investment research company, Morningstar, supports this by saying companies which embrace low-carbon technology are more likely to be future proofed and companies which treat their employees fairly are more likely to have consistent cash flows5.

And our own studies show that ESG issues make up an estimated average of 43% of the key medium-term financial performance drivers. This rises to an average of 50% for emerging markets and is even higher for sectors like mining, automotive and capital goods6.

Of course, sustainable investing – like any other form of investing – still comes with risk. This means there’s a chance you may get back less than you put in. And remember that a sustainable investment should be seen as a medium-to-long-term commitment, meaning you should be prepared to invest for at least five years.

Is your future in sustainable investing? 

So you’ve had a glimpse of how sustainable investing is positively reshaping the world around us. The question is, can you see a place for your money in it?

If you’d like to explore an ESG investing journey with us, we offer a range of sustainable funds through our online fund platform, Global Investment Centre:

To get started, you can open an account on our online fund platform in just a few clicks where you can find out more about any or all of the funds above, including the risk ratings and charges associated with each fund. There’s no commitment and you can take all the time you need to research what’s there. You can find out more about choosing your own investments in our guide to DIY investing.

To open a Global Investment Centre account, you need to have a current account or savings account with us. Eligibility criteria and charges apply.

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