Building financial success through sustainable investing

Every investment decision has the power to shape the future. Sustainable investing involves choosing investments based on environmental, social and governance (ESG) criteria. It aims to generate long-term financial success while supporting ethical practices and contributing to positive societal impact.

At First Financial, we see sustainable investing not just as a means to do good but as a smart strategy to manage risks and meet societal expectations. We recognise that investments causing harm can attract negative attention, potentially jeopardising their long-term success and returns. Here’s what you need to know about sustainable investing.

“There is no single definition of sustainable investing that everyone agrees on, so it comes down to what it means for us. For us, it means integrating ESG factors into the selection process,” explains Graeme Quinlan, a Principal and First Financial.

ESG criteria includes a wide range of factors:

• Environmental Factors: Evaluate a company’s impact on climate change, resource usage and overall environmental footprint.
• Social Factors: Assess labour practices, community involvement and the company’s impact on society.
• Governance Factors: Review leadership quality, executive compensation, audit practices, internal controls and shareholder rights.

Assessing the ESG performance of potential investments can be subjective, so we use a combination of external ratings and our own proprietary assessments. At First Financial, we also consider alignment with UN Sustainable Development Goals favourably. Our goal is to maintain a weighted average MSCI ESG rating of at least an ‘A’; anything less prompts a review. Monthly reviews ensure that investments continue to meet stringent criteria, allowing for individual companies to fall below this threshold temporarily if their shortcomings are deemed immaterial.

We educate clients on the benefits and risks of sustainable investing, including the impact of different ESG approaches on the investable universe. We acknowledge there is a spectrum of clients ranging from those who are mildly concerned about ESG factors to those who are extremely passionate.

Our first layer excludes the exceedingly nasty impact investments such as those heavily involved in gambling, tobacco or labour exploitation, for example. We call this the “Light Green” filter, and we simply avoid these altogether on the approved product list (APL). For our more passionate clients, “Dark Green” represents an inclusionary or impact-focused strategy, selecting investments for their positive ESG contributions and leading to a more selective, smaller universe. The effectiveness of ESG investing lies in its ability to filter out harmful options while identifying those that deliver real, positive impacts.

“By consistently filtering out more bad than good, this is the key to having a good investment experience, not just a ‘feel good’ investment experience,” says Graeme Quinlan.

We are dedicated to sustainable investing because we believe in upholding social and community standards and expectations. As responsible custodians of our clients’ capital, we are committed to ensuring their investments reflect these important values.

Balancing financial returns with sustainability objectives is crucial. Graeme Quinlan states, “It takes a qualitative, detailed and balanced assessment on a case-by-case basis. We have to be brutal when the thesis seems cuddly, but the financials don’t stack up. Conversely, we occasionally avoid a high IRR (internal rate of return) investment if the ESG rating is poor. We are optimistic the two may not always be conflicting in future.”

This approach ensures that each investment is scrutinised for both its financial viability and adherence to ethical principles. While doing good isn’t the primary objective, it is a valuable and welcome benefit. By rigorously assessing investments from both financial and sustainability perspectives, we maintain a well-rounded strategy.

The sustainable investing landscape is constantly evolving, requiring expertise and effort to stay current. At First Financial, we leverage software, research providers and proprietary ideas to stay ahead. While ESG was once seen as a niche or cult-like pursuit, it has become a standard pillar in investment analysis. ESG is now as integral to our decision-making process as traditional financial metrics, and it’s here to stay.

While ample information is readily available online for those new to sustainable investing, we highly recommend seeking professional advice. Expert guidance can help you navigate complex decisions and tailor your investments to align with your values and financial goals.

“Just because the information is available does not guarantee good choices. ESG is woven into the financial fabric of all our considerations when making sound decisions. Professional advice produces better results overall to combine financial success with the greater good,” says Graeme Quinlan.

Sustainable investing is not a passing trend, it’s a necessary evolution in the financial realm. By integrating ESG factors into investment decisions, investors can build portfolios that are resilient, ethical and profitable.

At First Financial, our sustainable philosophy underpins our investment management services. We specialise in guiding clients on this path, ensuring their financial success while positively contributing to creating a better world.

Contact a friendly member of our team to learn more about sustainable investing or start on the pathway to wealth today.

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