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5 Things You Need to Know Before Making an Ethical Investment

Sustainable investing used to be something that interested a small number of investors, but in recent years it’s gained popularity as the younger generation have been mobilised by important issues like climate change. More of us than ever before are taking an active interest in environmental, social and governance (ESG) issues when it comes to spending and investing our money. 

According to the new Mental Health Report by digital financial coaching app Claro, created in partnership with Mental Health UK and The Money Charity, 20% of Brits have used lockdown as an opportunity to improve their financial situation, meaning they are taking a closer interest in what they are doing with their money and what sort of impact they want their money to have in the world.

For those who do want to consider investing, how do you ensure you receive both financial and ethical returns from your investments? 

To help those who are hoping to place their money into ethical investments that resonate with their personal values, Galina Stavskaya, Investment Director at Claro, has shared five useful tips to follow:

Decide if ESG investing is for you

If you think ethical investing is just something for impassioned eco warriors, then think again. ESG investing simply measures how sustainable and socially impactful an investment in a company will be. Planning your investments using an ESG strategy is a way to gain a financial return as well as driving social and environmental change. 

At Claro, we like to think that most of us want companies to do more to protect the environment, care for their employees or ensure that their business practices are ethical. If you agree, then ESG investing is definitely something to consider. 

ESG investments have now made their way into even the most traditional investors’ practices, as the industry now recognises that companies that are tackling some of the world’s biggest problems, like climate change, are the ones that are more likely to be successful.

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Understand the three ESG categories

ESG is made up of three categories: Environmental, Social and Governance. 

Environment: This looks at how a company cares for the environment, focusing on waste, pollution and climate change initiatives.

Social: This looks at how a company takes care of its people and the community, taking into account employee representation, relations and working conditions.

Governance: Focusing on the more corporate side of operations, Governance looks at how a company is managed. It considers policies, regulations and executive behaviour.

The many factors and metrics involved in these categories often overlap. 

For example, if a company has a forward-thinking employment policy, this will fall into all three ESG categories. 

A forward-thinking employee policy shows good governance, supporting employee wellbeing suggests good social commitment, and a good ‘work from home’ policy also supports the environment by limiting transportation. 

Consider which values you feel most strongly about when considering an investment.

Understand ESG scoring systems

In order to better understand if a company is following good ethical and sustainable practices, you will need to review industry scores that take into account all three ESG categories. 

An ESG score tells you how well a company is performing against the environmental, social and governance standards used to analyse and rank it – this is also known as an ESG ranking. 

However, be warned: rating and scoring systems aren’t universal. Some investment agencies use a 1 to 5 method whilst others use a letter method, and there is yet to be a universal way to define and measure ESG impact. Furthermore, there is no regulator that verifies ESG information in the same way there is for verifying financial information.

Claro works with a market-leading industry data provider that gives our users rich data and insight on impact and sustainability-based metrics across different businesses and industries. 

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The ESG score of a company is measured through the lens of SDG, also known as Sustainable Development Goals. These goals are targets established by the United Nations, set to be achieved by 2030, that are designed to create a more equal and sustainable future for all. Considering how your spending and investing contributes to SDG is a great way to make more ethical financial choices.

Be aware of ‘Green Washing’

Researching a company’s ESG policies to find out if their values align with yours can be a minefield – particularly considering the challenge of identifying whether a company is being truthful in their environmental claims. 

Companies spend large amounts of money on marketing, using buzz words like ‘sustainable’ and ‘organic’ in order to make themselves seem eco-friendly, when in reality their efforts may be largely superficial, with their manufacturing and employment processes contradicting such claims. Concerningly, some companies have been revealed to be untruthful about certain areas like carbon emissions.

Make sure to dig a little deeper into a company’s green policies, looking at third party articles written about them and not just what’s on the sustainability page of their website. Alternatively, look for professionally managed investment funds with a credible process for identifying ESG investments.

Be confident in your decision

Whilst it can be difficult to decide which companies are best for you to invest in, you have plenty of time to master this decision-making process as you can be sure ESG investing is here to stay. 

Even if it does take a little more time to research than traditional investments, it can be an extremely beneficial way to invest your money with the potential of good returns and a clear conscience. 

It’s a positive way to put into action your ethical and environmental concerns. It can turn your thoughts and beliefs into a tangible impact as you can reinforce the importance of, and support businesses that prioritise, these matters.

An increasing number of investors are now looking at ESG investing as their go-to method because of its proven effectiveness. 

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