Sustainable Investments: Overvalued or Fair?

Ethical and sustainable investments are gaining in popularity. As consumers become more educated on sustainability, recent years have seen a considerable push for sustainable investments. Ethical and sustainable investments are made with the view of helping society, the planet for a better climate, and to avoid causing harm or condoning unethical behaviour. 

In most cases, ethical investments are typically based on personal preferences and objectives held by individuals. For this reason, it is essential to make sure investing choices align with unique personal choices. 

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The UK ranks second-highest country in Europe for ethical and sustainable investing, and in 2019, ethical and sustainable funds grew from £7 billion in 2012 to £20billion. In the 1980s, the first ethical funds for UK investors were launched and ever since then, there has been an upwards spiral of demons for them as more clients are looking for sustainable investing opportunities. With this in mind, over 50% of UK investors have increased their holdings in sustainable investments over the past few years. But what does ethical and sustainable investing look like?

What is ethical and sustainable investing?

As there is a growing need to make a difference in the world we live in today, more consumers are becoming acutely aware of the benefits of recycling and reducing single-use plastics. Additionally, consumers are watching fuel consumption and, in some cases, also trying to reduce meat consumption. 

These ideologies can be seen as spilling into investment decisions as now, for many investors, where their money is being invested is a more critical issue than five years ago when the outcome was only based on money. Therefore, they are actively seeking out companies to invest in that are committed to making an environmental change.

Why is it growing in popularity?

Climate change has played a significant role in increasing not only environmental awareness but also in increasing the appeal for ethical investments. Investors worldwide are seeing the damaging effects of global warming, including rising sea levels and warmer temperatures, which is influencing them - whilst increasing concern for our planet and the impact consumers have on it. 

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Today, investors want their money to positively impact the future of the planet and work with companies with an ethical ethos that they feel can be backed. Investors also want clarity with updates on how their money is being used, so they are fully aware of what they’re investing in. 

Is sustainable investing overvalued?

One of the biggest misconceptions of sustainable investing is that individuals are compromising their portfolio performance because of how unfair the investment rates are or how many companies are excluded from their portfolio. 

However, many companies that follow a strong environmental and social governance (ESG) mantra are likely to have better levels of success over time with the advantage of having fewer risks. This also includes corruption, fraud and bribery from more prominent stakeholders and investors. 

(Image Source: Early Metrics)

Positive ESG factors can be used to identify well-managed companies. However, they can also be used to identify organisations that are more than likely to come under pressure from regulatory changes, customer attitudes and, most importantly, environmental changes. 

Many consider ESG funds to be overvalued but in reality, not only have they had a positive year, the focus on the types of companies they work with is most definitely fit for the future, making them fair. In addition, ESG funds are heavily weighted towards big tech organisations, which, with no surprise, have had a tremendous year thanks to the covid-19 pandemic, which makes the value higher. 

Sustainability meets governance 

Supporting businesses that are focused on reducing the use of fossil fuels, improving health, reducing their carbon footprints and meeting the green needs of the planet are seemingly reasonable approaches to building long-term financial resilience to an investment portfolio. 

However, as money is beginning to flood in from investors, it does pose the question of the value of the investment. Due to the popularity rather than the substance of what the firm does. For this reason, will governance need to be launched in a way that helps to price assets and investments that become increasingly popular, making sure they are working for the investors rather than ripping them off?

For sustainable investments to carry on into the future and to remain popular, there needs to be a clear and governed way to make sure investors feel confident in their choices. Many investors need to know the firm is successful at working towards a better tomorrow and feel confident enough to part with their money and invest without questioning the ethics behind their decision.

Investment has taken off in enormous ways throughout the pandemic and has seen an influx of young investors taking interest. It’s for this reason that it’s significant to provide this type of investment moving forward.