Just because you want to shape the planet for the better with your investments, however, does not mean you no longer care about the risks of investing. The likelihood of losing your capital is probably just as important to you.
The good news is there does not need to be a trade-off. By taking a multi-asset approach to investing, I believe you can look to achieve the twin benefits of generating attractive returns within an acceptable level of risk, while also pursuing a better world for our future.
What is sustainable investing?
Sustainable approaches look to make investments that contribute towards a more sustainable future for society and the planet.
They go beyond considering the broad set of non-financial environmental, social and governance (ESG) factors that can meaningfully affect how an investment performs, especially over the long term. Integrating these ESG factors in investment analysis and decisions, alongside more traditional financial factors like profit and debt, is just a starting point.
Building on this foundation, sustainable approaches can adopt so-called ‘best in class’ approaches to choosing investments. These typically involve picking assets with higher ESG scores, excluding those that score poorly on metrics like carbon emissions, as well as companies involved in controversial sectors, such as gambling or alcohol.
Beyond this, the spectrum of investment candidates can be driven by sustainability-themed considerations, like addressing climate change or preventing pollution. Sustainable approaches might also focus on investing in themes or assets specifically related to sustainability, such as clean energy or green technology.
Sustainable investing can also incorporate impact goals, by investing in the assets of companies and organisations that intentionally look to solve the greatest challenges facing the global society and environment. Progress is often measured against indicators that align with the United Nation’s Sustainable Development Goals.
Why take a multi-asset approach?
There is a wide variety of assets that could be considered by those looking to invest sustainably. Multi-asset funds allow investors to gain exposure across asset classes – from company shares to government and corporate bonds – in one single investment.
Alongside their sustainability credentials, individual assets have their own investment qualities and risk-return profile. A multi-asset approach can combine a range of qualifying assets to build a portfolio that targets a particular risk appetite.
Some strategies deliberately take a more cautious stance – typically holding more bonds – while others are more growth-focused – typically holding more company shares. The breadth of approaches reflects different investor preferences.
As well as this strategic asset allocation, multi-asset fund managers can use their flexibility to invest tactically. I believe that ‘episodes’, when asset prices are moved much more by immediate market emotions rather than longer-term fundamentals, create opportunities for investors who can keep a level head. The market turmoil of early 2020, at the onset of the COVID-19 pandemic, is such an example.
The power of diversification
Holding a blend of assets limits exposure to any single asset, or even type of asset. While it cannot guarantee against losses, diversifying a portfolio can help investors pursue their long-term financial goals at a lower risk.
Effective diversification will involve owning assets that can perform differently in changing conditions. Multi-asset investors can therefore hope to withstand, and even benefit from, challenging market periods.
Investors do not need to choose between diversification and helping to protect the planet. The wide spectrum of assets that are compatible with sustainable approaches – including emerging asset classes like green and social bonds – means fund managers can aim to build portfolios that are well diversified, across asset classes as well as across different sustainability themes.
If you are looking to embed sustainability in your own approach to investing, I believe there are therefore solutions that could help you realise your goals, without taking on more risk than you’re comfortable with.
The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.
When you're deciding how to invest, it's important to remember that the value of investments goes up and down. So how much your investments are worth will fluctuate over time, and you may get back less than the original amount you invested.