What does ‘sustainable investing’ mean?

What does ‘sustainable investing’ mean? With so many potential definitions, we started as always by asking what clients who want a sustainable investment portfolio actually mean by that.

Overwhelmingly, they said that climate change was their number one concern, so we set about constructing portfolios that concentrated on companies with lower greenhouse gas emissions as this is the primary cause of climate change.

We always look for academic evidence to underpin the structure of our portfolios. Taking a scientific approach to sustainable investing means we can quantify just how ‘sustainable’ our portfolios are.

Our goal is to provide our clients with portfolios which do two things:

1. Push the sustainable lever as far as possible
2. Avoid compromising the expected risk or return

How have we done this?

All companies that would ordinarily be included in our portfolios are given a sustainability score. 85% of that score is based on greenhouse gas emissions whilst the remaining 15% is determined by land use and biodiversity, toxic spills, operational waste and water management.

The companies are then ranked from ‘good to bad’ according to their sustainability score. Once they are ranked, the process is:

• The worst offenders are excluded
• Less is invested in companies with poor sustainability scores than would otherwise have been the case
• More is invested companies with good sustainability scores than would otherwise have been the case

The result is:

1. The greenhouse gas emissions produced by the companies held within our sustainable stock market portfolio are 73% lower than those produced by the global stock market as a whole
2. The impact on volatility and return, purely as a result of the sustainable lens being applied, is negligible.

An important point to note is that there are some areas of the investment markets where we have not yet been able to find a sufficiently scientific way of investing sustainably. For example, our sustainable portfolios do not currently invest in emerging markets, but we are carrying out detailed research in this area so watch this space…

Will you make more or less money?

The evidence shows that Carbon’s approach to sustainable investing has a negligible impact on both the amount of money you will make and the volatility you will experience. When we compare our sustainable portfolios to our ‘full market’ portfolios, there are some differences in return. However, these are due to other differences between the portfolios, for example, the emerging markets point mentioned above, as opposed to the application of the sustainable lens itself.

Should you invest sustainably?

If you live your life with sustainability as a core consideration, then aligning your investments with your values is definitely worth exploring.

As with all investment decisions, it should be based upon your objectives and robust, academic research.

Should you wish to discuss sustainable investing or anything else related to financial planning advice, please contact us or speak to your usual contact at Carbon.

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.

Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.