At our annual UBS Forum roadshow we aim to help UK investors navigate the year ahead. This year we also wanted to help demystify the subject of sustainable and impact investing. Here is your guide to this current trend.
What is sustainable investing?
At its most simple, sustainable investing is about aligning your values and aspirations as a person with your money as an investor.
'Sustainable investing’ is investing in ways that take into account environmental, social and governance (ESG) factors in investment decisions. It has three main flavours.
1. Exclusions: This involves removing stocks from portfolios based on sustainability criteria. The most common exclusions are tobacco and controversial weapons.
2. ESG integration: This uses ESG factors to seek out opportunities or manage risks better. The key difference is that ESG integration as a strategy is seeking to outperform using these factors, whereas exclusion strategies are simply seeking to align your portfolio with your values (typically without underperforming).
3. Impact investing: This is the subset of sustainable investing that aims to generate measurable, positive environmental or social impact, and help solve specific social and environmental problems, in addition to delivering returns comparable to traditional financial returns. Impact investments tend to be made in private markets, such as private equity, private debt, venture capital and infrastructure. ESG integration tends to be done through stocks and bonds. Most impact investment is also seeking market-rate returns.
How do I know if a company is sustainable?
Evaluating Environmental, Social and Governance factors (ESG) is a way of determining whether companies are sustainable.
What difference will I be able to make?
This is the key question, but unfortunately there is no simple answer. It depends on the ambition and nature of your investment, whether you have gone for an exclusion, integration or impact approach and so on.
Typically, most of the impact happens in the impact investing bucket. However there are some other approaches which also deliver real impact.
Three criteria for measuring impact investing are: exploring intent, considering impact measurement and establishing verification.
How do I go about sustainable investing?
Sustainable investing in a nutshell
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The price and value of investments can go down as well as up. You may not get back the amount you originally invested.