ESG has become synonymous with sustainability. But, more broadly, it’s about evaluating companies from an environmental (E), social (S) and governance (G) perspective.
Socially responsible investing (SRI) is an approach to investing that considers both financial return and positive social/ environmental outcomes.
SRI practices include actively selecting or removing investments (negative-screening) depending on how a company ultimately affects the world around us. Investors might avoid stocks, ETFs or funds that engage in alcohol, tobacco production, gambling, weapons, animal testing, fossil fuel or human rights violations commonly because they are viewed to have a negative effect on society. Instead, investors might look for companies providing a net positive in the likes of education, social housing or environmental sustainability.
Impact investing is focused on supporting companies that aim to deliver a high degree of positive societal change and try to solve big challenges the world is facing. Being able to have clear and measurable goals, as well as quantifying impact, is at the core of these types of investments.
The value of companies with high ESG ratings for investors isn’t lost on the corporate sector. But unfortunately that can breed exaggerations or plain false portrayals of their sustainable credentials in a bid to boost the brand image.
This greenwashing has increased over the past years, due to the rising demand for eco-friendly, sustainable products and transparency around company policies.
Savvy consumers are able to identify greenwashing practices through thorough research into each company and making sure that they live up to the claims they make.
Supporting innovation and positive change across the world through companies that are aligned with sustainable values.
The possibility of better returns than companies likely to fall foul of regulations and fines due to subpar practices.
Fewer stocks, ETFs, investment funds to invest into support a diversified portfolio.
Sustainability data is not widely available and individuals need to do a lot of research to guide their investment decisions and avoid greenwashing.
Clean and green energy stocks are some of the most popular sustainable stocks Freetrade users are choosing to invest in.
Note that the above is not an exhaustive list of sustainable stocks and shares to invest in available on Freetrade. The list is not built taking in consideration a specific EGS criteria, it’s solely a collection of companies whose explicit aims fit with ESG principles or who are actively aiming to incorporate high ESG credentials into their businesses at the date of publishing this page.
Choose ETFs with a focus towards sustainability and social responsibility to provide broader market exposure to companies that have high standards of ESG and SRI.
The great thing about a stocks and shares ISA is that you can put the investments you want in it. That means you have the ability to match your money with your morals and avoid the stocks you’re just not keen on.
ESG ETFs might be able to help give general exposure to firms with high ESG scores, and then there are the stocks themselves. There used to be a belief that we had to give up some returns to satisfy doing some good in the world but that’s just not true.
Companies with an eye on treating their staff, customers and the environment well might even be exposed to less reputational damage or fines from falling foul of regulators. Keep watch though, you want to make sure they don’t drift from the aims you bought into.
Similar to an ISA, it’s not the pension itself that takes on a sustainable label, it’s what you put in it. And it’s that sustainability that might be most important to your long-term pension savings.
If a company is staring tougher regulations in the face because it is harmful to the environment, the society in which it operates, or isn’t governed well, that could mean a slow and painful demise.
The flipside of this is that companies leading the way in terms of ESG standards and running their businesses well over the years might even become more valuable the bigger they get.
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