Managing your wealth can be boiled down to three key elements: protection, growth and tax reduction – with each one equally relevant to people at all asset levels.
Sustainable investing is on the rise and increasing offered by wealth managers. While investing is of course about making a return, investors are becoming increasingly aware that they don’t necessarily have to choose between “doing well” and “doing good”.
It is now pretty mainstream for investors to wish to screen out investments which may harm the planet, its people or the global economy, or for them to look carefully at how a company is run before investing in it – and still expect to make some money. Some investors are even seeking to use their capital to generate some kind of social or environmental benefit as well as a financial gain from their investments.
What we may term the “positive investment spectrum” can be broadly split into three categories: ethical investing, sustainable/responsible investing and impact/social investing. It is worthwhile getting familiar with the terminology and basic premise of each, but you should consult your wealth manager about the specific investments available in each category and how they would impact on your portfolio.
Ethical investing is where an investor aligns their investment portfolio with their moral beliefs, which may mean that they avoid investments related to armaments, tobacco, pornography or alcohol. This is known as negative screening and simply means that certain asset classes, sectors or markets are excluded from the “investment universe” your wealth manager will recommend investments from.
(The opposite, positive screening, seeks out investments on positive ethical criteria). Screening does narrow the investment universe open to you, but an experienced wealth manager will be able to find ways around this and still fulfil your investment objectives.
Sustainable/responsible investing (also known as SRI) is perhaps a broader term, which can be usefully conceptualised as making investments which balance the need for businesses and investors to make a profit with a commitment to not harming the environment or the workforce. SRI is often concerned with examining the Environmental, Social and Governance (ESG) credentials of companies before investing in them. Again, this may narrow the range of investments open to you, but research suggests that companies which are well run in ESG terms may represent less investment risk. A highly-polluting company may be more likely to fail over the long term due to bad publicity, for example.
Social or impact investment is where investors provide finance to organisations and initiatives which generate both social/environmental and financial returns, with the two inextricably linked. One example might be a biotech firm which works to help those in the developing world but whose research has commercial applications in Western markets; another could be a charity issuing debt to fixed income investors in order to fund their long-term strategic plans.
It is often the case that the returns from social/impact investing are only modest, but it may be that you are happy with getting a slightly lower financial return in exchange for helping towards a greater social one. Investors should also be aware that the 2014 Budget extended generous tax reliefs (like those already in existence for Enterprise Investment Schemes) to social investing. Your financial adviser can suggest ways in which you might like to take advantage of social investment tax reliefs as part of your long-term financial plan.
Getting the right expertise
Most of the larger wealth managers (and indeed some of the smaller ones) are able to offer investment portfolios with some kind of ethical or sustainable overlay today. However, the depth of expertise and the variety of products and services on offer in this area will vary considerably from firm to firm. It is also very important to choose a wealth manager which will be able to correctly interpret what you want from your investments on the ethics front – and this means that you have be able to build a good rapport with them. This is another reason why it is crucial that you engage a wealth manager which you feel you could be happy working with for the long term.