The long-term financial plan you have in place is a complex puzzle that is individual to you. That’s why, at Jane Smith Financial Planning, we pride ourselves on creating a bespoke and tailored solution each and every time.
One way we might do this is by aligning your investment with your values on sustainability issues.
The world of ESG investing – investment that concentrates on funds attitudes to environmental, social, and governance issues – has erupted over the last decade or so. It received a further boost at the onset of the coronavirus pandemic. But some investors remain sceptical about ESG funds and stubborn myths persist.
Keep reading to find out about the three most common ESG-related questions we get asked, and a look at the all-important answers.
1. Does ESG investing mean accepting lower returns?
A persistent myth around ESG investing is that it’s an act of altruism that comes with an inherent cost – that aligning your money with environmental or social issues means knowingly sacrificing returns.
The evidence, though, suggests that this isn’t the case.
Morningstar reported on ESG fund performance during 2021 and found that sustainable returns generally outpaced those of conventional funds. The European Securities and Markets Authority (ESMA), meanwhile, found in 2020 that ESG funds outperformed conventional investments and were also cheaper overall.
As with any investment, though, there will be ups and downs. Citywire confirmed that 2023 was the worst year on record for sustainability funds. Outflows resulted from, among other factors, rising concerns about greenwashing and the politicising of the sustainability debate in the US and at home.
Even so, FTAdviser reported in April 2023 that the impact of ESG choices on investment performance is “non-existent”.
With major regulatory changes on the way, 2024 is set to be a watershed moment for sustainable investing.
2. Are ESG funds as ethical as they say?
Over recent years several high-profile funds, companies, and organisations have come under fire for making false or exaggerated claims about their ESG credentials.
Back in 2015, Volkswagen became embroiled in an emissions scandal after their cars were found to have “cheated” emissions tests. More recently, the band Coldplay came under fire while promoting a low-carbon footprint world tour, in partnership with Finnish oil company Neste.
Arguably, the most high-profile case involved climate activist Greta Thunberg, who accused the Edinburgh Book Festival of greenwashing due to its sponsorship by Baillie Gifford, one of the UK’s largest and oldest investment management firms.
Whether greenwashing is an intentional ploy or a well-meaning mistake, it has the power to reduce investor confidence. And that’s why the FCA has stepped in.
After a long consultation, the FCA released its policy statement on Sustainability Disclosure Requirements (SDR) and investment labels in November 2023. In his March 2024 budget, the chancellor confirmed that ESG ratings would soon be government-regulated.
The FCA rules include:
- Anti-greenwashing rules for FCA-authorised firms ensuring sustainability-related claims are fair, clear and not misleading
- Four labels to help consumers understand investment products and improve trust in sustainability options
- Making information more readily available to help consumers assess a product’s key sustainability features.
The plans will be implemented over the next three years and should see increased investor confidence across the ESG landscape.
3. Does ESG investing actually make a difference?
Make My Money Matter is a campaign co-founded by filmmaker Richard Curtis.
Its aim is nothing less than transforming the financial system, putting people and the planet on par with profits. And one of the main ways it looks to do this is by encouraging us all to “green” our pensions.
There’s currently around £3 trillion in UK pension pots, with £88 billion of that money invested in fossil fuel companies like Shell and BP. That’s £3,000 for each pension holder. Meanwhile, for every £10 you put into your pension, £2 is linked to deforestation.
Greening these funds could make a huge difference.
The campaign suggests that greening your pension could reduce your carbon footprint by a massive 21x more than going vegetarian, giving up flying, and switching your energy provider.
Note: It’s also important to remember that switching your pension won’t always be the right option, and you’ll need to speak to us before you make any big retirement decision.
As we have seen, though, aligning your money with your values could have a huge influence on global sustainability, and it doesn’t have to mean accepting lower returns.
Get in touch
If you have questions about ESG funds and your investment, speak to us now. Please contact us on info@janesmithfinancial.com or call 01234 713131.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
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