Values-based investing has become a progressively popular topic of conversation in the financial world. Many investors are expressing interest in funds that not only perform well but also align to their values, beliefs and ideals. This involves looking at a company’s corporate practices, policies and mission to determine how well they line up.
There are, essentially, three categories within this approach:
- Negative/exclusionary screening – This was the initial form of values-based investing. It creates alignment by screening out companies or industries based on certain criteria, such as alcohol, tobacco, gambling or weapons.
- Environmental, Social and Governance (ESG) factor investing – Unlike exclusionary investing, ESG investing includes seeking out companies based on desirable criteria, such as climate change, health and safety and diversity.
- Impact investing – This approach combines a focus on both financial and social benefit. These tend to be larger, private investments that focus on industries such as clean technology.
More about ESG
Environmental, Social and Governance (ESG) investing is a quickly growing investment strategy that focuses on investing in alignment with its three factors. These include:
- Environmental – Environmental factors are how a company manages its environmental impact; particularly with regard to climate change, sustainability, carbon emissions and waste management.
- Social – Social factors focus on the business’ policies regarding matters such as the health and safety of its employees, community action, data protection and privacy.
- Governance – Governance factors largely have to do with business ethics. What does the company do to support diversity and inclusion? Do they support fair and sustainable compensation?
Making a difference and returns
There are often deep-rooted concerns that investing in line with your values can’t possibly yield enough returns to be a viable strategy. Though understandable, these fears are not necessarily founded in reality.
There is some evidence that negative/exclusionary investing may yield smaller returns. On the other hand, ESG investing has shown evidence that it can have a positive (or, at least, neutral) effect on returns. As the green sector grows, further research will be able to give a clearer insight into the long-term impact of this kind of investing.
If this type of investing is something you are interested in, it’s worth exploring this member page on investing for good. It can also be useful to speak to a professional adviser before making any significant financial decisions.
The future of values-based investing
The future is looking green. With increased public awareness and demand, sustainability and human rights are at the forefront of consumer thinking. As new start-ups with ESG focuses and entire sectors changing the way they work become more prevalent, so do the options for investing in them. Additionally, governments across the globe are recommitting to environmental changes.
In the recent UK Budget for 2021, Chancellor Rishi Sunak announced that the government would be investing millions of pounds in a range of green programmes. After the inauguration of President Joe Biden in the US, the country has rejoined the Paris Climate Agreement. In 2015, the UN set out its goals for sustainable development and is continuing to work towards achieving these goals by 2030.
Interested in ensuring your investments are made in alignment with your values? Take a look at the Creative Pension Trust Ethical Fund. It combines exclusionary and ESG investing to create a fund that ensures your money is invested in line with your ideals.