The concept of sustainability, which is often described as meeting the needs of today without compromising the ability of future generations to meet their own needs, has become a big deal in recent years. Aware that the world’s resources are finite, many people are now far more cognisant of the products they buy, the foods they eat, and the transport they use.
Interest in sustainable investment strategies – which seek to generate a financial return while also considering environmental, social, and governance (ESG) factors – has increased significantly too. For example, according to Morningstar, in 2019 sustainable investment funds in the US attracted flows of roughly $20.6bn – nearly four times the amount of flows in 2018.
Wondering how to invest sustainably in the UK? Here’s a look at three different ways to get exposure to sustainable companies.
1. Sustainable investment funds
One of the easiest ways to invest sustainably is to put your money into an investment fund that has a sustainable focus. These kinds of funds are becoming increasingly prevalent. And many have performed very well in recent years, outperforming the market.
For example, the Investec UK Sustainable Equity fund, which was launched in late 2018 and invests in companies that are making a positive contribution to the future of society and the environment, delivered a return 33.6% last year, beating the FTSE 100’s return of 17.3% by a wide margin. Similarly, the Royal London Sustainable Leaders fund, which invests in UK businesses that are are deemed to make a positive contribution to society, outperformed the Footsie significantly as well.
Many sustainable investment funds with a global focus did well last year too. For example, the Liontrust Sustainable Future Global Growth fund returned 29.4% for the year, beating the 22.7% return from the MSCI World index comfortably. Meanwhile, the Janus Henderson Global Sustainable Equity did even better, returning 38.7% for the year.
These performances suggest that actively-managed funds can be an effective way of investing sustainably.
2. Sustainable ETFs and index funds
An alternative way of investing sustainably, however, is to invest in passively-managed exchange-traded funds (ETFs) or index funds that have a sustainable focus. The advantage of these funds is that they are generally cheaper than actively-managed funds.
One example here is the UBS ETF (IE) MSCI United Kingdom IMI Socially Responsible UCITS ETF. This ETF returned 22.9% last year. Another example is the Legal & General Ethical Trust, which returned 28.8% in 2019. If you’re looking for global exposure, the iShares Dow Jones Global Sustainability Screened UCITS ETF is a popular choice among investors. This ETF returned 26.3% (USD return) last year.
3. Sustainable stocks
Finally, I’ll point out that it’s possible to construct your own sustainable investment portfolio by investing in companies that have sustainability at the heart of their philosophies.
Examples that come to mind include packaging giant DS Smith, which I own myself and which says that sustainability is the “foundation” of its overall business strategy; and Impax Asset Management, which specialises in sustainable investment management strategies.
Do your research, and there’s no reason you can’t construct a robust, sustainable portfolio that has the potential to deliver strong long-term returns.
