Sustainable investing for young investors

While there have always been investors who wished to align their money with their values, it hasn’t always been easy.  That’s because there wasn’t much accountability across the industry as a whole to ensure that companies were operating sustainably.

In recent years, however, environmental, social and governance (ESG) standards have become common measures used to assess how firms operate and hold  those who demonstrate substandard practices accountable.

As sustainable investing gains momentum, it’s becoming easier than ever to invest sustainably. Here’s everything you need to know.

Sustainable investing: E, S and G factors

So, what does ESG really mean? Each letter stands for a standard that companies are measured against. The “E” is the one people tend to think of first. With climate change such a pressing issue, companies are increasingly scrutinized for their environmental impact.

The “S” and “G” are often less obvious but are gaining more attention. Companies can no longer neglect their organization’s social credentials, which can include maintaining an inclusive workforce and ensuring the correct treatment of consumers. And governance looks at how organizations are led and managed, ensuring ethical decision-making and transparency.

ESG screenings help to root out instances of poor governance and force companies to act more responsibly in general, knowing that asset managers will hold them accountable.

Today, there’s far more scrutiny of firms’ practices across the board.  

Ethics can look different for everyone

Part of the increased scrutiny of a company’s ESG credentials is the emergence of thematic funds designed to suit investors’ own ethical demands. The attention different funds pay to different sustainable investing qualities means there will be alternative ways to invest in line with your particular set of values.

On one end of the spectrum, managers may exclude entire industries that they deem to be damaging from their funds, while other funds screen for companies that offer a meaningful positive impact.

Portfolio managers may, for instance, use a combination of negative and positive screening to uncover the sorts of businesses that meet their fund’s high ESG standards. Once they have excluded ones they think demonstrate negative behaviour, such as tobacco or gambling firms, they may decide to invest in a company only if it can also demonstrate at least one positive behaviour, such as community investments or good working practices for gender or racial equality.

This example demonstrates how different funds with their own set of niches and priorities can give you the flexibility to match your investments with your individual outlooks.

Sustainable investing and sustainable returns

At the heart of sustainable investing is the search for companies that are building sustainable futures, companies that have good management and transparent practices, and that are not going to come under fire for not complying with regulations. All of this doesn’t just make for a good set of ethics, it also makes for a good company.

 Companies that boast strong ESG factors have tend to outperform those that don’t. As Fidelity’s Jeremy Podger says, “Adopting ESG principles in investment is compatible with, and will likely enhance, the investor’s traditional risk and return objectives.”

As this generation accumulates wealth, companies will be put under increasing pressure to ensure their practices comply with consumer demands. This is a more socially conscious generation, meaning ESG is only likely to grow in prominence as it wields greater influence. And remember, young people are long-term investors. ESG investing is fundamentally all about the long term. It’s there to ensure that both your finances and our society remain sustainable.

Want to learn more about sustainable funds? Check out the following funds from Fidelity: