Investing with Purpose: why it matters and how to do it

I am far from a whizz when it comes to savvy financial management – stocks, shares, portfolio allocation, funds and dividends are all terms that tend to make my brain go fuzzy and switch off. It’s just not my thing. So, who am I to be giving financial advice I hear you ask? Fair point.

That said, you don’t need to be a financial whizz to understand that money and power are inextricably linked and therefore investing money in ways that can help the planet rather than exacerbating the problems we face, is a smart move.

“How so?” I hear you ask. Think about it. Your workplace or personal pension fund is invested in different ‘pots’ , supporting a range of businesses, initiatives and assets. If that money is invested in sustainable assets such as renewable energy projects, environmentally-friendly technologies or green infrastructure, it will be ‘doing good’. It will support the transition to a low-carbon economy, promote sustainable development and reduce greenhouse gas emissions.

If, on the other hand, the same pension fund is invested in fossil fuel companies (oil, gas, coal producers), it will actually be contributing to climate change, deforestation, habitat destruction and environmental degradation. The challenge is that unless you specifically ask, you may have no idea that your money is helping to fund these problems.

Make My Money Matter and Aviva have done research that shows how switching pension contributions from a broad global equity index to equity-focused sustainable funds can cut a person’s carbon footprint by 21 times more than going vegetarian, giving up flying and switching energy providers.

Of course, it’s not just on pension funds where you can make a difference. The same principles apply to other financial investments and of course there are social as well as environmental impacts to be considered when deciding where to invest your (or your company’s) money.  

In recent years, the idea of investing with purpose has gained momentum globally and there has been a paradigm shift, with investors increasingly recognizing the importance of the connection between financial performance and sustainability. This has given rise to the concept of Environmental, Social, and Governance (ESG) investing, which looks beyond bottom-line profitability to consider a company's impact on society, the planet and its governance practices. Whilst there are some concerns about how this movement might be leading to greenwashing, the general principles that underpin responsible investing look set to remain and indeed become mainstream.

What is ESG investing?

ESG investing involves evaluating companies based on a set of criteria that measure their environmental stewardship, social responsibility, and corporate governance practices. Environmental factors may include greenhouse gas emissions, the management of resources and the sourcing of materials, as well as the company’s impact on nature. Social factors encompass issues such as labour practices within the value chain, diversity and inclusion, and community engagement. Governance factors involve assessing a company's leadership structure, board diversity, risk management and transparency.

The Growth of ESG Investing:

The growth of ESG investing has been staggering. According to the Global Sustainable Investment Alliance, sustainable investing assets reached $35.3 trillion globally in 2020, a 15% increase from 2018. In the UK, ethical funds attracted a record £10.8 billion in net retail sales in 2020, reflecting the surge in demand for ethical investment products. This reflects a growing awareness among investors of the interconnectedness between financial performance and ESG factors. Furthermore, regulatory changes, shifting consumer preferences, and mounting evidence linking ESG performance to better risk management and financial outcomes all suggest responsible investing is here to stay.

Why It's Important:

Investing with purpose is crucial for several reasons. Firstly, mitigating the risks that accompany issues such as climate change, human rights violations, and falling foul of regulations. From a company perspective, those that effectively manage ESG factors are more resilient and better positioned for long-term success in a world that is increasingly volatile, uncertain, complex and ambiguous. Secondly, ESG investing can drive positive societal and environmental impact by directing money towards companies that promote and support a more sustainable future. And thirdly, it fosters accountability and transparency, encouraging companies to operate in a manner that benefits all stakeholders, not just shareholders.

What can I do as an individual?

From an individual perspective, there are things you can do to ensure that your money helps to solve rather than exacerbate the many problems we face in the world today. In relation to any investments you may have, the key thing is to ask questions of your provider to ensure that you’re not inadvertently supporting unsustainable, unethical or unequitable practices. Ignorance is no excuse. You can ask for and choose ethical funds, but do take advice on their performance to ensure you’re not making a decision that is ethically, but not financially sustainable for you – balance is key!
Think about other ways your money can play a part in the drive to a more sustainable future – your bank account, savings, insurance and mortgage are all powerful tools that can be used for good. This article from The Guardian looks at various ways your finances can save the planet. It also highlights an ethical money site that may be of particular interest to WIB members – Good With Money. Take a look at the free guide to financial wellbeing for women, because as the article says, we’re still paid less and have half the pension pot of our male counterparts!

Top tips for investing with purpose

We face multiple challenges in the world today and we each have a responsibility to do our bit to support positive change. We can do that through considering the impact of how we live and making changes to how we travel, the foods we eat and how much ‘stuff’ we buy and all of that will help in small ways. Being purposeful about your money and investments has the potential to do much more but it’s often overlooked or not understood.
Be purposeful, ask questions and ensure your money works for the planet and its people as well as working for you.
To find out more about how we can help your company to embrace ESG and sustainability, contact gillian@giraffeassociates.com