Three pathways to build the portfolio you want

Please note: This article is designed to be thought leadership content, to offer big picture views and analysis of interesting issues and trends that matter to our clients. It is not designed to be taken as the preferred view from Barclays Private Bank, expert advice, investment advice or a recommendation, and any reference to specific companies is therefore not an opinion as to their present or future value or broader credentials (ESG or otherwise). Reliance upon any of the information in this article is at the sole discretion of the reader. Some of the views and issues discussed in this article may derive from third-party research or data which is relied upon by Barclays Private Bank and may not have been validated. Such research and data are made available as additional information for the reader where appropriate.  

Key points

• Investors shouldn’t miss out on the benefits of sustainable investing to tailor their portfolio for their goals, simply because the terminology can be confusing
• Learning the differences between, and implications of, ethical, responsible and impact investing can help you select which one(s) best help you meet your long-term goals
• Armed with this knowledge, you can engage your family, peers and advisers in discussions around how to implement it
• Moreover, in uncertain, volatile times, investors can use sustainable investing to take more control of their portfolios to direct them toward desired results. 

If investing successfully requires using the best tools to target your desired returns and outcomes, then sustainable investing should be part of your toolbox. 

Despite its merits, many investors have hesitated to embrace sustainable investing due to confusing jargon or concerns about portfolio implications. Choosing not to use this approach may mean missing some of the benefits it can offer, both financially and impact.  

Inaccurate media headlines, political rhetoric and marketing materials add to the confusion for investors. Terms like 'ethical', 'impact', 'ESG' and 'SRI' are all often used interchangeably, disregarding their distinct meanings. Sustainable investing can be mistakenly treated as a single, uniform idea. It is not. 

In the first of a two-part series on the subject, we clarify three distinct sustainable investing approaches and what they could bring to your portfolio.  

Clarifying three approaches to sustainable investing 

Elements of sustainable investing have existed for many years, but the field has crystallised over the past two decades. Despite rapid adoption, it has suffered from the lack of a universally accepted or understood language.  

That said, investors don’t need to wait for an industry consensus. By understanding the fundamentals of three distinct approaches to sustainable investing, you can take greater control of your portfolio. 

1. Ethical investing  

For centuries, ethical investing has shaped investors’ portfolios with pre-determined values or beliefs by preventing their capital from being invested in specific activities they deem to be 'wrong'. This approach enables them to apply their personal, religious or universal views to their investment portfolio. 

In practice, the approach establishes criteria about specific activities an investor does not want to fund, and stops them from entering their investment universe. Common exclusions include tobacco, gambling or adult entertainment. 

Importantly, investors’ motivations are inherently personal. Investors may hold different, even opposing, beliefs; yet they are all individually valid. Moreover, excluding sectors may mean forgoing potential returns if those sectors outperform. However, for an investor, following their ethics may be more important than any financial gain.  

2. Responsible investing  

Responsible investing seeks to improve the investment process, and by extension financial performance, by incorporating non-financial factors into decision-making and actively exercising stewardship of assets. 

Formally launched in 2006 with the Principles for Responsible Investing, this approach recognises that material, sustainability-related risks from the wider world can directly affect financial performance.  

It centres on analysing internal operating practices, categorised into environmental, social and governance (ESG) dimensions, each supported by metrics, data and insights. Additionally, it involves voting and engaging management to influence corporate behaviour on these issues. 

The core thesis is straightforward: companies at risk from, or that poorly manage, material ESG factors are likely to underperform their peers. Unfortunately, the initialism ESG has been widely, and incorrectly, used as a generic label for all sustainable investing.  

This obscures its original and continuing purpose: to improve long-term investment performance in line with fiduciary duty. These potential benefits are why we highlighted it in Navigating stormy markets with ESG factors to help investors during the expected volatile market conditions ahead.  

3. Impact investing  

Impact investing begins with a fundamental recognition that every enterprise, and therefore every investment, affects people and the planet. These effects can be large or small, positive or negative, intended or unintended. 

Based on this premise, it seeks to help investors to allocate funds with the intention to generate positive, measurable social and environmental impact alongside a financial return. This approach goes beyond considering how external factors affect investments to also include how investors, and their capital, can shape the world. 

Practically, its primary focus is to invest into commercial solutions to the vast range of social or environmental issues. In addition, investors can narrow the focus on geographies, communities and desired impact timeframes or scales. 

With impact investing, objectives always blend financial and impact aims; though investors can shift their relative importance for specific investments or portfolio allocations. So, while some investors may occasionally prioritise impact outcomes over financial returns, a conscious consideration of both dimensions occurs throughout the investment process.  

This dual focus allows for more precise allocation and selection of investments to achieve specific financial and impact priorities. 

One size does not fit all investors

The table below summarises the key elements of the approaches.  

Additionally, investors should appreciate: 

• There’s flexibility in how each approach can be implemented and no single way to apply them
• Skills and expertise will vary, affecting potential financial and impact outcomes
• Approaches can be used independently or in combination, and are not mutually exclusive. 

Understanding these approaches ensures your investment strategy can reflect both your financial aims and broader values. 

Moving from clarity to portfolio action  

To leverage these different approaches effectively: 

• Start with your sustainability preferences, not products
  Begin by clearly articulating your aims and priorities against the three approaches, getting support if needed. Document these before selecting products, to maintain control rather than be led by available offerings. 
  
  
• Look beneath the language
  Don’t rely solely on fund names, regulatory labels and marketing materials, as these provide an imperfect view of the actual approach. Request how investment managers apply these approaches, including methods, tools and data. Rigorous early due diligence prevents misalignment between your expectations and actual outcomes. 
  
  
• Communicate to your advisers
  Advisers can only support your goals if they know them. Most clients have never explicitly shared their sustainability preferences with them. Using this framework, you can give clear, actionable guidance on what matters to you and why, allowing others to assess your current portfolio and identify future, suitable opportunities.  

Start by building a shared understanding  

Sustainable investing is not a passing trend; rather it is a fundamental evolution in investing. This article provides a primer to help you select the best approach(es) for your financial and impact objectives. A follow-up one to this will further clarify how these approaches operate in practice.  

This framework can be shared with your advisers, family or peers to develop a consistent, shared understanding about sustainable investing and how it can help you to achieve your aims, whether financially or for the planet.