Sustainable investing is a great way to help tackle the world’s biggest challenges, such as social inequality and global warming. To illustrate, moving your savings to sustainable investment funds can be 27x more efficient at reducing your carbon output than taking shorter showers, flying less, travelling by train instead of by car, and eating less meat, according to Nordea’s 2019 sustainability report.
But how risky is sustainable investing compared to traditional investing? Can you make a profit over the long term? We look to answer these questions, helping you decide if sustainable investing is right for you.
Note: if this is the first time you’ve heard of sustainable investing, read our e-book to learn the basics.
The popularity of sustainable investing
To understand the financial potential of sustainable investing, it helps to know the scale of this market and whether or not the popularity in sustainable funds can be maintained in the future.
This growth has been driven by a few different factors. For one, governments are funding sustainable businesses, especially those at the forefront of emerging technologies that are disrupting the market and helping to tackle global challenges like climate change. For example, in 2020, the UK government announced £134 million in cleantech funding. The private sector is also eyeing these pioneers as a good investment and consequently, they are attracting more interest and capital from investors.
Increasing consumer demand has also been a huge influence, which has grown exponentially since the pandemic: 60% of Millennials, 44% of Gen X and 35% of Baby Boomers confirmed that COVID-19 has increased their appetite for sustainable investments (Prudential).
Is sustainability the future of investing?
What’s more, sustainability could dominate the corporate landscape within years thanks to the changing behaviours of businesses. The Harvard Business Review highlights:
“Virtually all of the world’s largest companies now issue a sustainability report and set goals; more than 2,000 companies have set a science-based carbon target; and about one-third of Europe’s largest public companies have pledged to reach net-zero by 2050.”
As such, many investors may find that the large public companies in their portfolios, which were originally operating on a traditional business model, will have transitioned to become sustainable businesses in the future. This could mean that their traditional investment funds (which are heavily focused on profit) will evolve to sustainable funds over time as the world responds to the climate crisis and its wide-reaching consequences. Effects of change won’t necessarily be as quick or thorough as investing in businesses that have sustainable practices now, although it bodes well for the future.
So, sustainable investing is set to grow exponentially, judging by the behaviour of current investors and large public businesses. And, as sustainable businesses attract more interest and capital, this could increase the money-making potential of sustainable funds.
There are other reasons why sustainable funds could perform well over the long term compared to traditional funds. Let’s look at look at these factors in more detail, focusing on the actions and outcomes of sustainable businesses that could make up your portfolio should you choose to invest sustainably.
1. Building a competitive advantage
There’s a reason why Shell has set a target to be a net-zero emissions business by 2050, while Visa Inc. is matching charitable gifts up to $10,000 per employee as well as giving individuals 16 hours of Volunteer Time Off annually. Yes, it will strengthen their impact on important global matters. But it will also set them apart from other brands now and in the future, giving them a competitive edge to help them be more successful.
Modern consumers are ready to pledge their loyalty to companies that adopt sustainable business models and actively ‘do good’. 75% of Millennials are eco-conscious to the point of changing their buying habits to favour environmentally friendly products (Nielsen). And the vast majority of Generation Z shoppers prefer to buy from sustainable brands. They’re also willing to spend 10% more on sustainable products (First Insight).
If companies want to hold their value and stay relevant, adopting sustainable and socially responsible business models and practices should help them attract conscious consumers, driving growth. This could improve the performance of sustainable funds if the businesses within the portfolios communicate their sustainability effectively.
2. Increasing customer loyalty
As well as gaining a competitive advantage, sustainable businesses may be more likely to retain their customers.
A report by the Capgemini Research Institute, which surveyed 7,500 consumers and 750 large organisations, found that 77% of organisations say their sustainability approaches have increased customer loyalty. 63% have also seen a revenue uptick (Capgemini Research Institute).
It’s common knowledge that it costs five times more to attract a new customer than it does to retain one. If sustainable companies become better at increasing customer loyalty and, as a result, customer retention, they could drive profitability and ensure sustainable growth. Again, it’s critical that the company in question has validated and visible credentials in ESG (Environment, Social and Governance) to ensure it can maintain trust with its consumers over the long-term. To learn more about ESG, read our sustainable investing Q&A.
3. Reducing operational costs
There’s strong evidence that businesses shifting to more environmentally friendly energy sources can reduce their overall operational costs. Of the wind, solar and other renewables that came on stream in 2020, nearly two-thirds (62%) were cheaper than the cheapest new fossil fuel (IRENA).
Reducing water consumption also helps businesses save money. Water Wise recently revealed that between January and the start of August 2019, Water Plus multi-site customers have identified savings of more than £100,000 a year from constant water loss (Water Wise).
With these long-term cost savings, in the future sustainable companies may have larger budgets to spend on innovation, recruitment and marketing, driving their overall profitability and increasing more interest and capital from investors.
4. New growth opportunities
An effective way for companies to increase their market share is through innovation that attracts customers and new opportunities for funding.
Businesses focused on sustainability have exciting opportunities to drive innovation. For example, they can design products and services that are more accessible to people with disabilities. To illustrate, companies lose approximately £2 billion a month by ignoring the needs of disabled people, and the online spending power of disabled people is estimated at over £16 billion (We Are Purple).
Also, organisations adopting a circular business model (which is a sustainable alternative to a traditional linear business model of “make, use, dispose”) are additionally exposing themselves to new opportunities for growth – the circular economy is a $4.5 trillion opportunity (Waste to Wealth).
Is sustainable investing a safe option?
Any form of investing, whether it’s sustainable or not, carries some degree of financial risk. But what we’ve uncovered is that sustainable businesses, which may make up a portfolio in a sustainable fund, have the potential to grow and be very successful in the future.
This could indicate that sustainable funds may perform well over the long term. That’s why we often recommend investing in sustainable funds in addition to traditional funds as a way to spread money across different investments to increase profitability.
Working with an experienced, independent financial adviser is the easiest way to increase your chances of making a profit on your investments. They harness data, knowledge and analysis to help you make smarter sustainable investment decisions.
Learn more in our blog: Why use an adviser when exploring sustainable investment.
The value of your investments can go down as well as up, so you could get back less than you invested.