What is sustainable investing?

Today, savvy investors ask a lot of questions about where their money is going. They're demanding, inquisitive and – when it comes to matching their investments with their values – highly engaged.

Climate change, sustainability, and ethical preferences are now common discussion points when getting to know clients. Far from compromising outcomes, sustainable investing has the potential to enhance long-term financial returns while making a positive impact on people and the planet.

As Earth Day approaches on 22 April, it’s a timely opportunity to cut through the jargon and help clients better understand sustainable investing. In this article, we aim to simplify the key concepts and support confident, meaningful conversations about aligning investments with long-term goals and values.

What is sustainable investing?

How should we define the umbrella term of sustainable investing? It’s an investment approach aimed at investing in companies that operate sustainably and have a positive impact on society and the environment, alongside financial objectives. This means that the companies should be operating responsibly and considering material with environmental, social, and governance (ESG) considerations for example by reducing emissions, treating employees fairly, and maintaining strong oversight, while ideally providing products or services have a positive impact on the environment.

Perhaps the easiest way to describe it to customers is that it’s about investing in companies that don’t just perform well financially but do so sustainably.

Why sustainable investing?

So why is interest in sustainable investing on the rise? And why does it matter?

Sustainable investing matters because it is reshaping the way capital influences the world, while still supporting long-term financial goals.

Identifying and investing in companies that are helping make the world cleaner, healthier, safer and more inclusive is an objective that few would argue against. Sustainable investing is rooted in the idea that companies tackling today’s biggest environmental and social challenges – from reducing carbon emissions and developing renewable energy, to improving healthcare and food security – are often the ones best positioned for long-term growth.

As Mark Carney, ex-governor of the Bank of England, observed, “Strong ESG scores could signal that a firm is more naturally disposed to long-term strategic thinking and planning.” Natixis.

For example, a company with a history of environmental pollution or poor labour practices may well end up performing badly in financial terms as well. Conversely, a company that prioritises sustainability may well be taking a longer-term view of its growth prospects, generating more dependable profits and benefiting investors.

Sustainable investing also matters because it gives investors a way to align their money with their values, whether that is to avoid sectors they find harmful or to support companies demonstrating strong ESG performance. This growing desire is seen especially among the younger generations. Many studies have shown above-average interest among younger investors in combining return-seeking strategies with an ESG focus.

This demand from younger generations is one of the other key drivers behind the rising interest in sustainable investing.

To sum up the case for sustainable investing; it aligns with what clients care about, and it can also make long-term financial sense.

The sustainable investment spectrum

To provide the right solution for clients, advisers need to unpack the confusion of terms that fall under the sustainable investing umbrella; terms that clients will often use interchangeably.

Sustainable, ethical, SRI, ESG, impact – they’re all investment approaches that reflect a balance between financial objectives and different sustainability ambitions. But understanding, and being able to explain, those differences is crucial to helping clients articulate how much weight they place on avoiding more controversial industries versus achieving a positive impact, and how they want sustainability integrated into their portfolios.

The breadth of the sustainable investment universe means that investors no longer face a binary choice between returns and responsibility. Working alongside the right provider, advisers can give their clients the flexibility to choose from a spectrum of investment approaches that blend financial performance with different environmental and social outcomes.

Investor stewardship

The sustainable investment process isn't just about choosing your preferred style or who's in and who's out. Investors can also influence companies and help generate more positive ESG outcomes through stewardship activities. This primarily involves pushing for positive change by utilising voting rights on all eligible shares at company AGMs, alongside proactively engaging with company management and boards to increase sustainability practices and improve a company’s long-term value.

Is sustainable investing right for your client?

Establishing whether sustainable investing is right for a client requires a blend of discovery, education and suitability analysis.

• The starting point is to understand the client’s motivations and values. For example, are they driven by ethical concerns, a desire to manage long-term risks such as climate change or governance failures, or are they looking to contribute to positive social or environmental outcomes?
• A clear explanation of the different sustainable approaches – ESG integration, ethical/SRI exclusions, and impact investing – helps clients articulate what they truly want. Many clients use these terms interchangeably, so advisers play a key role in aligning expectations with reality.
• Clients need to be equally clear about the trade-offs. These aren’t necessarily drawbacks, but simply the realities of aligning their money with sustainable goals. Performance may differ from broad market benchmarks due to reduced exposure to sectors that may perform well in certain market cycles. Applying exclusions or strict sustainability criteria can limit diversification or increase concentration risk. ESG and sustainability ratings introduce some subjectivity and can vary widely between providers. There is also the risk of greenwashing, where marketing claims may overstate a fund’s environmental or social impact.
• Once the client’s preferences are understood, advisers need to find the right ESG solution based on their sustainability aims, risk profile and time horizon. At Parmenion, we make it easy to translate client needs into a suitable investment, by offering tools to simplify the process and a comprehensive and credible range of ESG solutions.

Which Parmenion sustainable investment solution would work for you?

Parmenion has led the way in providing ESG and sustainable investments since 2012. Our well-established, multi-award-winning range of ESG and sustainable solutions is designed to meet a wide spectrum of client views and values.

Demand for ESG and sustainable investing has grown rapidly in recent years, as has the range of investment styles. We make it simple by offering a choice of solutions – which we call our ESG Growth range – to cover four styles of ESG investing. Each client will have their own personal views on ethical issues, so our solutions aim to capture a broad cross-section of the investable universe, to suit a host of values and beliefs.

For sustainable investors, Parmenion offers three actively managed ESG solutions, and a passive alternative for clients seeking a more cost-effective solution.

• Sustainable Growth – this solution is well suited for Sustainable investors given its focus on achieving positive environmental and social outcomes. And while this solution does not have a dedicated Impact mandate, it does seek to encourage positive change, and underlying funds often pursue measurable benefits and positive real-world outcomes.
• Ethical Growth – this solution’s mix of positive alignment and negative exclusions make it a great option for Ethical and SRI investors looking to balance their own moral values with the ability to generate positive environmental and social change.
• Screened Growth – this solution’s focus on negative exclusions aligns well with Ethical or SRI investors driven by their own strict morals and values, and the desire to avoid investing in more controversial areas of the market.
• Passive ESG Growth – this solution contains elements of many different approaches to ESG, including both negative exclusion and positive tilts, albeit to a lesser degree than our active solutions. This makes the solution a good fit for investors without a strong preference on style and who are happy with a lighter-touch approach, but who still want their money invested in line with ESG and sustainability principles.

We offer 10 risk-graded versions of each strategy, making it easy to match them to a client’s particular objective and attitude to risk. Asset allocation is actively managed to keep portfolios aligned with the shifting investment environment.

Our ESG solutions also benefit from independent oversight from an experienced panel of ethical and ESG experts. Their challenge and guidance play a critical role in supporting our fund manager due diligence, giving you additional confidence that your client’s money is in the right place.

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This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.