The importance of creating a sustainable portfolio in 2023

Investors have been both blessed and cursed with the opportunity to choose from a myriad of investment strategies. Among these, sustainable investing has certainly gained popularity for much more than its financial benefits.

When investing their money, more investors are thinking about factors beyond financial returns, amid increased urgency in humanity’s fight against climate change. By creating a balanced, future-focused portfolio, investors can have a positive impact on people and the planet while making sure their investments are resilient in a fast-changing world.

In this post, the latest in a series on sustainable investing, we’ll look at how to find this happy medium.

ESG or SDG?

Sustainable investment, or responsible investment, has different meanings.

For many investors, environmental, social and governance (ESG) criteria are still considered the benchmark of a sustainable investment. To qualify as ESG, companies or funds must match certain green metrics, as well as meeting social and corporate governance standards.

ESG funds have faced criticism in recent years, however, for lack of standardisation in the metrics employed to assess ESG performance (we dig into this topic further in our blog post ‘What is the cost for doing good?’ which you can access by clicking here).

Other ethical investors like to build their portfolios in line with some of the 17 Sustainable Development Goals (SDGs) proposed by the United Nations as part of its 2030 Agenda for Sustainable Development.

There are many other green investing strategies beyond these two common examples. Individual investors, for example, might choose funds or companies they personally consider as having a good sustainability impact, irrespective of ESG or SDG ratings.

Engaging with unsustainable companies can have the greatest impact

Building a sustainable portfolio can be achieved through exclusion, which means avoiding investments that have a negative impact on sustainable development. By excluding the most polluting companies or sectors that do not align with their mandates, some investors build a portfolio that does not contribute to the more carbon-intensive industries and sectors.

Alternatively, many investors prefer to engage with companies to improve their environmental performance instead of simply shunning the big polluters. The scope for positive change is much larger for companies currently with worse ESG ratings, which can make investing in them more impactful.

Some investors pick stocks or funds that already have (relatively) low greenhouse gas emissions or companies that can demonstrate strong social engagement. Companies that promote renewable energy or other long-term environmental benefits are likely to be high up in ethical investors’ lists.

Future-proofing your investments

The Intergovernmental Panel on Climate Change (IPCC)’s latest report revealed that Planet Earth is currently on a dangerous trajectory. The widely quoted figure of 1.5°C of global heating – the target set at the Paris Agreement 2015 – will almost certainly be surpassed. What can individual investors do to have a positive environmental impact while protecting the growth of their portfolio?

For decades, fossil fuels have powered rich economies and spurred growth that has improved living standards for people in these economies. In the 21^st century, however, more investors are choosing to exclude fossil fuel companies from their portfolios because many consider green investments the best strategy for long-term growth.

The importance of a balanced portfolio

An investor might potentially have a higher impact by taking the approach of buying shares in fewer carefully selected companies, or a single sector such as clean transport. Picking companies or funds you believe have the greatest impact can maximise your influence – and your returns if they perform well.

On the other hand, risk-adjusted sustainable investing can allow investors to buy a wide range of stocks with less risk that meet sustainability criteria. By diversifying across multiple companies, sectors and countries, investors are protecting themselves from the risks of over-exposure. A multi-asset approach can also allow investors to commit more capital to sustainable investing without increasing their risk of losses.

The adage about time in the market is especially true of green investments, as these can help investors achieve long-term growth by establishing a portfolio that will continue to perform long into the future.

How investors are fighting against greenwashing

Given the rising popularity of sustainable investing, it is not surprising that companies are keen to showcase their ESG credentials. This demand is having a positive effect by encouraging genuine engagement on environmental improvements.

However, a less helpful side effect of the green trend is the growth of greenwashing. This usually means when a company spends more time focusing on making itself seem sustainable than on doing anything to reduce its environmental impact.

Investors who choose to take positions in polluting companies to make their operations more sustainable can help fight greenwashing by using their shareholders’ rights to hold the leadership to account.

Invest in a way that suits you

Investors with multi-asset funds can choose their preferred level of involvement. A bespoke portfolio allows you to influence the asset allocation, whereas a multi-asset Open Ended Investment Company (OEIC) will invest on your behalf.

Generally, it is cheaper to invest through an OEIC and investors can easily achieve diversification using this option. However, bespoke portfolios allow for a greater degree of customisation, making them especially useful for anyone looking to maximise their impact in specific areas.

The PWM Green Matrix is a great example of how this can be achieved. Our independent sustainable methodology helps us to match your individual requirements to the most appropriate sustainable options, allowing you to build a bespoke portfolio easily and effectively.