Can you align your portfolio with your principles?

We all want to leave the planet in a better state than we found it.

Over the past few decades we’ve learned more than ever about the effect our actions have on society and the environment. And it’s changed the way a lot of us live our lives.

Sustainable investing – what does it mean?

A need to be more sustainable is feeding through into the way people choose their investments too. But investing sustainably means different things to different people, and there are lots of different ways to go about it.

One way is to avoid investing in companies that do harm. Companies in the tobacco, mining and weapons industries, for instance, arguably make the world a worse place to live. So some investors choose to steer clear of these areas.

Let a fund manager choose

If you’d rather not choose the companies for yourself, you can put your money with a fund manager who invests in a way that’s consistent with your ethical standpoint.

Ethical funds try to give you the best performance while not investing in areas they think do harm to the planet and society. But while fund managers will do their best to limit investments in certain areas, it’s difficult to guarantee zero exposure. To do so might excessively reduce the number of companies they can invest in.

Take tobacco for instance. It’s easy not to invest in tobacco companies themselves, but what about supermarkets that sell cigarettes? Or the company that makes the packaging? Different funds deal with this issue in different ways so it’s important to check you’re happy with a fund’s investment policy before investing.

Does it affect performance potential?

Many ethical and sustainable funds will perform well over the long term, but they won’t perform the same as unconstrained funds.

If the areas of the market they exclude perform well, the chances are that ethical funds will underperform. But ethical funds could do well if these industries suffer a setback. Like all investments, their value will fall as well as rise, so you could get back less than you put in.

Excluding areas like tobacco, mining, banks and alcoholic drinks companies means a lot of the FTSE 100 is off-limits for ethical funds. This means they often have more invested in small and medium-sized companies. These have the potential to perform well over the long term, but with the higher potential reward comes higher risk too.

Find out more about ethical investing

Avoiding companies that do harm is just one way to invest with morals in mind. Another approach would be to consider a company’s impact on the environment and society as part of your analysis. Or you could invest in companies that have a positive effect on the world, like those that produce green energy.

We look at the pros and cons of each of the main approaches in our guide to investing responsibly. Plus we show you how to find funds that invest in a way that’s consistent with your views.

Your guide to responsible investing

See our latest sustainable investment ideas

Our articles and guides are designed to provide useful information to help you choose your own investments, but they aren’t personal advice. If you are not sure whether an investment is right for you, please seek advice.