What are the different types of sustainable investing?
A guide to sustainable investing: The key types explained
You’ve probably heard many different terms used to describe sustainable investing. Sometimes, these just sound like buzzwords and it can be difficult to understand what they mean. That’s why we’ve put together a handy, jargon-busting guide to help.
What is sustainable investing?
Sustainable investing is all about investing in companies that have a positive impact by using environmental, social and governance-related insights to determine where funds are invested. It means you can pursue your investment goals in a way that aligns with your values and protects the planet.
At CIRCA5000, the companies in our portfolio have been assessed in detail. Before adding to our portfolio, we carry out a detailed investment process to assess the following:
- Impact: To make sure that our portfolio includes truly sustainable companies, we carry out a thorough impact assessment. Prospective companies must show that they align with at least one of the UN’s Sustainable Development Goals (or SDGs). We then review their investment strategies, to ensure that they’re delivering on their objectives and not just greenwashing.
- Return: We always review the growth potential of our portfolio. By looking at a company’s growth, profits and valuations, we can work out whether or not it’s likely to offer attractive financial returns in the future.
- Risk: We carry out detailed risk assessments to make sure that the risk level is appropriate to the strategy.
We constantly review our portfolio and assess our funds to make sure that they still meet the criteria listed above. You can find out more about our investment funds here.
Why is sustainable investing important?
Sustainable investing allows you to invest in companies that share your values, giving you more control over your finances and more insight into where your money is going. These companies will be aiming to make a profit, but in a way that benefits the wider world. They may be developing new technology or materials to help the planet, or they may be helping humanity to prosper through things like health and education.
At CIRCA5000, we have three portfolio types for you to choose from, meaning you can invest in companies that specifically align with your values:
- People: These companies focus on things like health, education and cyber security, to help people and societies to thrive.
- Planet: These companies look at sustainable food, water and energy resources to encourage sustainable development for the planet.
People and Planet: This portfolio type is a combination of our ‘People’ and ‘Planet’ types. You’ll be investing in companies that focus on energy, water, food, health, education and cyber security.
Different types of sustainable investing
If you’ve been doing a bit of research on sustainable investing, you may have noticed a few different terms bandied about. Although some of these do have unique definitions, others are actually just generic terms used to describe various types of investing.
Here is a breakdown of the key terms you’re likely to come across:
Socially Responsible Investing (SRI)
Socially responsible investing (SRI) is a form of investing that takes into account an investor’s moral principles. Generally, this means that companies involved in activities such as weapons manufacturing, tobacco or adult entertainment are excluded. Socially responsible investing tends to exclude the very worst companies, but it may not include some of the most sustainable ones either.
Environment, Social and Governance (ESG)
ESG investors consider how environmental, social and governance risks and opportunities will influence the future performance of a company. They look to invest in businesses that are being run well, whilst avoiding big ESG risks (such as fossil fuels and palm oil), and typically engage company management on the three elements to ensure continual improvement.
However, you should keep a watchful eye on ESG holdings, as there is room for greenwashing – meaning companies may not be as sustainable as they appear on the surface.
Businesses that don’t meet the ESG criteria can also be featured in these portfolios, unless properly vetted by the investor. For example, you may find energy companies, fast food chains and fast fashion brands listed in some portfolios. Often, these types of companies are included because they have at least 30% of women on the board, or because they have some employee benefits – but, of course, they’re still not the most sustainable companies to invest in.
Whilst impact investors are also concerned about ESG risks, their main focus is to support companies that are making a positive impact on the world, rather than just avoiding those that have a negative impact.
One of the most important considerations for impact investors is that the change must be measurable. For example, an impact company in waste management could measure the amount of waste going to landfill and record how much they manage to reduce this each year. The improvements made must be tangible and clear to investors. Otherwise, it could be a fake impact investment (known as ‘impact washing’).
You can learn more about impact investing here.
Other terms you may come across
There are plenty of other terms that you may hear, including ‘green investing’ or ‘ethical investing.’
Ethical investing in particular – whereby investments are made based on a person’s ethical code – may be faith-based. This means that investments are made in companies that align with a person’s religious values, such as Christian or Islamic principles. If this isn’t what you’re looking for, you should do some additional research before investing.
Generally speaking, the terms ‘green investing’ and ‘sustainable investing’ both indicate that the companies in a portfolio have been chosen based on their environmental or social impact. Usually, these investments are either SRI or impact investments (or somewhere between the two), but you may need to read up on the fund in question to understand exactly how their portfolio is managed.
Take a look at our downloadable fund guide to learn more about the different kinds of companies you’ll be investing in with a CIRCA5000 investment account.
Sustainable investing is becoming a key focus for investors, who want to ensure that their funds don’t just benefit themselves, but help the planet and our society too. Sign up for a CIRCA5000 investment account today or visit our support page to find out more.
The information provided above does not constitute financial advice. You should fully understand the products you intend to invest in before making an investment decision. As with all investing your capital is at risk.