The conversation around behaving more conscientiously grows louder daily, with socially responsible investing also part of this societal shift. Yet investing according to your values doesn’t have to be an all-or-nothing commitment – better understanding the rationale and benefits of this strategy can help you decide if it’s suitable for at least some of your overall investments.
A sustainable shift
Fuelled by a surge of investment opportunities and investor demand, the market for more responsible investments is growing rapidly. According to Bloomberg, with fresh records set again in 2021, the value of sustainable investments overall is anticipated to hit $50 trillion by 2025.
While the field is described (and to an extent, nuanced) in different ways, whether labelled ESG (Environmental, Social and Governance) investing, responsible investing, or socially responsible investing, the underlying focus is similar – to give investors a meaningful option to invest more responsibly for the planet and in line with their values.
You shouldn’t have to compromise on your values when investing, nor compromise on value when aiming to achieve your investment objectives.
Strength in convictions
More and more evidence is emerging that companies who behave better – including towards the environment, their workforce and to their communities – are becoming more profitable. This typically makes them a better investment opportunity, especially over the long term.
Research shows that good ‘corporate citizens’ are generally less prone to litigation, have robust governance procedures and often project more appealing brand values. (Think of companies with positive green credentials, for example.) So it stands to reason that these firms are less likely to face costly court battles and may be more favoured by consumers compared to their competitors.
“Good ‘corporate citizens’ are generally less prone to litigation, have robust
governance procedures and often project more appealing brand values.”
The Principles for Responsible Investment is an initiative (convened by the UN) – “developed by investors for investors” – which aims to develop a more sustainable global financial system. They highlight an analysis of over 2,000 academic studies into how ESG factors affect corporate financial performance, and found “an overwhelming share of positive results,” with just one in 10 showing a negative relationship.
London-based Square Mile Research also reported in October 2022, that in the previous five-year period, average UK all-companies responsible investment funds outperformed their non-responsible counterparts by 2%.
Meanwhile, a 2021 analysis by US investment giant Charles Schwab showed that ESG funds performed “better than average overall”, and dropped less than their peers more often across several market downturns.
None of these results knock the ball out of the park, but they do help to allay persistent fears that investors are punished for choosing a more responsible route. Now it’s becoming clearer that you don’t have to compromise on performance, either, when investing according to your values.
Helping with diversification
Diversifying your investments is viewed as such an accepted way to build an enduring portfolio, it should be considered a foundational pillar of investing.
Yet being diversified in itself is not enough. You should be appropriately diversified – across different assets (eg, equities, bonds, commodities) and across different regions, but also with a suitable level of diversity within each asset class.
For example, as Netwealth senior portfolio manager Simon McConnell highlights in this investment bulletin, US Treasury bonds may have potential, but it’s important to take a view on whether short-term or longer-term Treasuries are more preferable.
There are compelling arguments now that responsible investments should also be included as part of the mix – to help investors diversify further, and give them access to opportunities they may not get from conventional funds alone.
How we help investors to invest more responsibly
At Netwealth we naturally help investors achieve a good level of diversification, and also offer socially responsible investments with a choice of seven risk levels.
And just as with our core portfolios, our powerful online planning tools (free to use when you register) help you get a much clearer picture of how your responsible investments could help you achieve your goals over time.
Investing responsibly is a personal choice, but if you are interested enough to find out more, please get in touch.
Please note, the value of your investments can go down as well as up.