Sustainable Investments: From ESG to Faith-Based, What Options Are Available?

Sustainable Investing: An Overview

• Sustainable investments integrate environmental, social and governance (ESG) factors into investment decisions alongside financial considerations.
• Common approaches include ethical investing, impact investing, socially responsible investing (SRI) and green-themed strategies.
• Investors can choose portfolios focused on ESG leaders, companies in the process of transitioning towards sustainability, those pursuing measurable impact, or a combination of these.
• Although sustainable investments are increasingly accessible and competitive, they may not be suitable for every financial objective or risk appetite.
• Consulting a regulated financial adviser can help align your values with a long-term investment strategy tailored to your needs.

Example: A UK-based investor seeking to avoid fossil fuels could select a socially responsible fund that excludes oil and gas companies. Another might choose an “improvers” fund focusing on energy utilities actively transitioning to renewables.

Sustainable investing enables you to support the causes you care about — from environmental protection to human rights or faith-based values — without necessarily compromising returns.

This guide explains what sustainable investing means, how to assess its quality and the range of approaches currently available.

What Is Sustainable Investing and How Does It Work?

Sustainable investing refers to strategies that aim to generate financial returns whilst also delivering positive outcomes for society and the environment.

It goes beyond traditional profit-focused investing by also considering:

• Environmental impact: e.g. reducing carbon emissions, using clean energy
• Social practices: e.g. workers’ rights, diversity and inclusion, ethical supply chains
• Corporate governance: e.g. board independence, executive remuneration, transparency

Sustainable investing does not mean sacrificing returns; rather, it broadens the investment perspective to include long-term impact and resilience.

For instance, a fund manager might sell shares in a company linked to deforestation, even if profitable in the short term, to reduce long-term environmental risk.

Avoiding Greenwashing

Greenwashing occurs when funds are marketed as sustainable without clear or credible ESG integration.
To avoid it, always:

1. Check that the fund has clear ESG objectives and metrics (e.g. CO₂ reduction targets).
2. Review its methodology and any third-party certifications.
3. Ensure alignment with recognised standards such as the SFDR (EU) or the UK Sustainability Disclosure Requirements (SDR).

If a fund presents itself as “green” but has large holdings in companies operating in the fossil fuel sector, this could be a red flag. Conversely, a fund that publishes annual data on CO₂ emissions reductions and reports on its commitment offers greater credibility.

How to Identify High-Quality Sustainable Investments

Not all sustainable investments follow the same principles. They are often categorised by their investment philosophy and sustainability objectives.

Overview of Core Categories

Example scenario: An “impact” fund could support microfinance programmes in emerging markets, while an “ESG leader” fund might hold established clean energy companies.

In the UK, the SDR (Sustainability Disclosure Requirements) will soon label funds to help investors distinguish authentic ESG strategies from those with minimal sustainability focus. Similar standards are already in place in the EU under the SFDR.

Sustainable vs Traditional Investing

Traditional strategies focus primarily on financial return, often ignoring social or environmental consequences.

Sustainable investing, by contrast, integrates ethical, environmental and governance factors. This might mean excluding sectors such as fossil fuels or tobacco, or actively engaging with companies to improve their practices.

A sustainable fund, for example, might exclude coal mining but invest in electric vehicle manufacturers to benefit from the long-term growth of clean transport. For instance, an ESG-screened UK equity fund might underweight oil majors like BP and overweight renewable energy developers such as SSE.

While some high-yield sectors may be excluded, sustainable strategies are increasingly competitive and align more closely with long-term economic and regulatory trends.

Common Types of Sustainable Investment

There are several distinct approaches, each with its own philosophy and objectives (comparison table below):

Socially Responsible Investing (SRI)

An SRI equity fund uses negative screening to avoid sectors considered harmful (e.g. tobacco, weapons, fossil fuels) thus might exclude all companies involved in tobacco production, arms manufacturing or gambling. For example, it might remove British American Tobacco and BAE Systems from its portfolio, focusing instead on consumer staples and technology companies with cleaner ESG profiles.”

Ethical Investing

Those are investments based on personal or shared moral values (e.g. animal welfare, fair labour). What is considered “ethical” is subjective. One investor may exclude companies conducting animal testing, while another may prioritise climate impact.

An ethical fund might avoid fast fashion retailers linked to labour rights controversies and prioritise brands with Fairtrade or B-Corp certifications. For example, it might underweight companies such as Shein or Primark and increase allocations to Patagonia or other certified ethical brands.

ESG Investing

Data-driven investments that use scoring systems for environmental, social and governance performance.

i.e. A UK-based ESG-integrated global equity fund could overweight Unilever for its high supply chain standards and carbon reduction targets, while underweighting companies with weak governance structures or excessive executive compensation.

Impact Investing

This type of investing goes beyond risk analysis and scoring, seeking to generate direct, measurable positive outcomes alongside financial returns.

An impact investment fund could allocate capital to micro-solar grid projects in sub-Saharan Africa, measuring outcomes such as the number of households gaining access to electricity for the first time. Another example could be investing in microfinance institutions such as FINCA to support small business creation.

Faith-Based Investing

It aligns portfolios with religious teachings or spiritual values.

A Sharia-compliant fund will exclude banks that derive significant income from interest-based lending and companies involved in the alcohol or gambling industry. For example, it could invest in halal-certified pharmaceutical companies or businesses operating in the clean energy sector instead of conventional banks.

Green-Themed Strategies

These investments focus specifically on environmental sustainability and target sectors such as clean energy, sustainable agriculture and low-emission transport.

A green bond fund could finance the construction of offshore wind farms in the North Sea or sustainable transport infrastructure such as low-emission rail networks across Europe.

While green investing shares objectives with broader ESG or impact frameworks, it is best understood as a thematic focus rather than a standalone methodology.

Comparison of Common Sustainable Investment Types

Is Sustainable Investing Right for You?

Sustainable investing may be suitable if you:

• Care about the wider impact of your investments.
• Wish to avoid industries you consider harmful.
• Value transparency and accountability from the companies you invest in.
• Focus on long-term value and responsible risk management.

Things to keep in mind:

• Sustainable funds may have slightly higher fees.
• Short-term performance can deviate (positively or negatively) from traditional benchmarks.

In the UK, advisers must take account of your sustainability preferences when constructing your portfolio.
Example: if you are opposed to animal testing, you can request funds that exclude pharmaceutical companies engaged in such practices.

Key Takeaways

• Sustainable investing combines financial objectives with ESG, ethical or impact-related priorities.
• Strategies include SRI, ethical, ESG-based, impact-focused, faith-based and green-themed approaches.
• These approaches often overlap and vary in terms of transparency and risk management.
• Always review the underlying assets and ESG reporting standards before investing.
• For personalised advice, consult a financial adviser authorised by the FCA.

What You Can Do Now

Now that you have a clearer understanding of the different approaches to sustainable investing, take the time to review your current portfolio and your long-term investment objectives.

Here are the next steps you may wish to consider:

• Explore and evaluate the sustainability options offered by your investment platform (for example, ESG-screened funds, impact-focused portfolios or green-themed investments). If it doesn’t currently offer funds that match your values, you might consider switching provider or discussing custom ESG screens with your adviser.
• Compare these options with your ethical values, financial goals and risk appetite to determine whether any adjustments are appropriate.

If you are unsure where to begin or would prefer advice tailored to your personal circumstances, seek the support of an independent financial adviser. A regulated professional will be able to help you define your sustainability preferences, explain the potential implications for costs and performance, and develop a long-term investment strategy that reflects both your ethical priorities and your financial objectives.