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3 reasons to consider a sustainable fund

We look at three reasons to consider investing sustainably and offer a sustainable fund idea.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.


All information is correct as at 31 December 2021 unless otherwise stated.


Over the past few years, sustainability has gone mainstream.

Groups like extinction rebellion grabbed newspaper headlines, environmental campaigners like Greta Thunberg became celebrities and TV shows like Blue Planet 2 and Seaspiracy opened our eyes to the impact we have on the planet.

The government hasn’t stood still on sustainability either. The UK was one of the first countries to commit to cutting greenhouse gas emissions to ‘net zero’ by 2050. That means emissions will have to be avoided completely or – if that's impossible – balanced by finding other ways to reduce carbon in the atmosphere by the same amount, like planting trees.

The commitments made at the COP26 climate change summit, held in Glasgow, demonstrated just how important sustainability is becoming across the globe. Fighting climate change is high on the political agenda for almost all countries, and many large businesses too.

Sustainability is playing a much bigger part in government policy, company strategies and even the way we live our lives. And this trend isn’t going away anytime soon.

Sustainability-focused funds aim to benefit by investing in companies that are more sustainable than their competitors or likely to benefit from the growing need for more sustainable goods and services.

Here are three reasons to consider one for your portfolio.

This article isn’t personal advice. All funds and the income they produce can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, ask for financial advice.

1. Futureproof your portfolio

We’ve already seen a raft of sustainability-related legislation here in the UK. But if we’re to reach net zero emissions by 2050, there’ll need to be a lot more. Companies that fall foul could face penalties, but those already positioned for a more sustainable world could benefit.

It’s not just regulation that’s changing though. Peoples’ preferences are changing too. We care more about the way companies behave, and are likely to change our spending habits based on the way companies act. In an era of social media, any negative press can quickly lead to outrage and boycott. This could impact a company’s revenues and share price, and even cause long-term reputational damage.

2. Add diversification

Sustainable funds come in a variety of shapes and sizes. Some invest across a broad range of sectors, countries, and companies. Others focus on a particular theme, like renewable energy, water and sanitation or health and wellbeing. Some invest in companies that are sustainable today, while others invest in companies whose sustainability credentials are on course to keep getting better.

Lots of sustainable funds invest more in companies capable of above-average growth (often measured in earnings or cash flow), sometimes known as 'growth' companies. Areas like technology, which typically have less impact on the environment, tend to feature heavily in sustainable funds.

Sustainable funds normally avoid areas viewed as less sustainable, like fossil fuels. Many will also avoid companies that some investors find unethical, like those in the tobacco and gambling industries.

This means sustainable funds will perform differently to the broader stock market, and more traditionally invested funds.

3. Feel good factor

If you’re passionate about sustainability but invest in unsustainable businesses, your values and investments could be misaligned. Sustainable funds let investors live their values by supporting companies that are positioned to thrive in a more sustainable world and investing less into those that aren’t. In doing so, investors are helping to do their bit to create a more sustainable world for future generations.

Fund in focus: BNY Mellon Sustainable Real Return

Launched in April 2018, the BNY Mellon Sustainable Real Return fund follows the same robust investment process, implemented by the same team, as the BNY Mellon Real Return Fund – which has been on the Wealth Shortlist since December 2010, but with more emphasis on sustainability. It's relatively conservative in its approach, so adding it to a portfolio could help reduce risk.

The team aims to make money in a variety of market conditions. The fund's 'return-seeking core' invests mainly in the shares and bonds of well-run, financially secure companies. They think these companies have a unique set of advantages over their competitors. They also consider how well those companies manage their impact on the environment and society compared to their competitors.

The rest of the portfolio invests in government bonds, commodities, and cash, with the aim to help dampen the volatility of market ups and downs. The managers have the flexibility to invest in emerging markets, high-yield bonds, and derivatives which, if used, adds risk.

Lots of the fund’s investments are taking an important role in the transition to a more sustainable future. It currently invests in connector and sensor maker TE Connectivity, whose products help to support the fast-growing electric vehicle market.

The fund has sustainable 'red lines' which means it won’t invest in certain companies. It won’t invest in companies that violate the UN Global Compact Principles (a UN pact on human rights, labour, the environment, and anti-corruption). Or those that aren’t able to help limit global warming to 2°C.

The fund also won't invest in any company that makes more than 10% of its revenues from a variety of controversial industries, including fossil fuels, tobacco, gambling, and munitions.

The team aims to support positive change through the way they use their voting rights and by engaging with the companies they invest in.

Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Find out more about BNY Mellon Sustainable Real Return, including charges

BNY Mellon Sustainable Real Return Key Investor Information

Want more information on sustainable investing?

If you want to learn more about sustainable investing, take a look at the new responsible investment section of our website. It’s got everything from tips and tricks to help you get started investing responsibly to fund ideas.

READ MORE

Explore our Investment Times January 2022 edition for more articles like this.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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