01 Dec 2022
The two key benefits of responsible investing
Looking to build wealth without compromising on the values you apply to other aspects of your life? Then responsible investing is something you should look at more deeply.
What is responsible investing?
Responsible investing is an investment approach that balances two main objectives:- Aligning with the investor's personal values, and
- achieving good returns.
Responsible investing has been part of the financial landscape for decades. But in terms of most consumers’ perception, the approach has more recently shifted from fringe to mainstream, to simply smarter investing, as it also influences companies to be more environmentally and socially accountable.
How can ethical investing give you attractive returns?
The business sector is learning that a focus on environmental, social and governance (ESG) issues isn’t just a nice to have, it’s essential for long-term survival.
Therefore, choosing investments associated with better environmental, social and responsible governance can be a smart strategy for creating lasting future value and future returns.
Why invest in responsible companies?
Other factors considered, companies that demonstrate responsible practices are more likely to succeed into the future. Let’s explore why and how these companies attractive to both fund managers and investors seeking alignment in terms of values:- More transparency:
- Lower costs:
Through efficiency, innovation and conserving resources, these organisations can save on energy, water, and waste management overheads in the long term.
- Brand loyalty:
Gen Z and Millennial consumers are informed, engaged and passionate about environmental and social issues. Their buying power will grow over the next 2-3 decades, and they will choose to give their custom to brands who are doing the right thing.
- Committed people
Happy employees stay longer and are more productive, while sustainability and diversity are powerful tools when it comes to attracting talent.
Practices like these can translate into business success and the bottom-line profitability of the companies who adopt them. This in turn makes funds that invest in these companies more attractive to investors.
What are the benefits of ethical investing?
As we’ve discussed, responsible business practices support competitive advantage and business success. However, responsible investment funds experience market ups and downs just like other share-based investments do. While many ethical funds achieve attractive returns, there are some risks to be aware of.
- Limiting portfolio diversity:
By focusing your investment portfolio in favour of ethical considerations, you may risk compromising on returns by taking on extra risk and volatility, or missing opportunities. To balance this risk, look for a fund that invests in a broad selection of companies with potential for growth.
- Responsible doesn’t automatically mean profitable:
Businesses with an ethical focus still need to have a commercially and financially sustainable rationale behind them. As an investor, look for a fund with the expertise and experience behind it to identify ethical investment opportunities with strong potential for success.
- You could pay higher fees:
Some ethical investment funds may charge higher fees. While you don’t want to compromise on returns, neither should you have to pay more for the feel-good factor of investing sustainably. Your fees should be similar to those of an equivalent 'mainstream' fund managed in the same way.
Responsible investing is well worth looking into. Just as businesses who embrace responsible practices in their business operations will thrive in the future, it follows that investing in such companies will provide sustainable opportunities to build wealth.
Our free guide will help you understand the basics of ethical and socially responsible investing.
