ESG (environmental, social and governance) investing has been a hot topic over the last couple of years. In fact, ESG funds now account for 10% of all worldwide fund assets.
But as an investor, how do you determine where and how to invest with an ethical strategy? Read on for everything you need to know about ESG investing.
ESG investments are on the rise
According to a report from Reuters, during 2021, $649 billion poured into ESG-focused funds. This represents an increase of more than $107 billion invested in 2020.
Meanwhile, Bloomberg suggest that global ESG assets are expected to exceed $53 trillion by 2025. This represents more than a third of the $140.5 trillion in projected total assets under management around the world.
What is ESG?
Before you can decide what approach may be suitable for you, take some time to consider the types of ESG issues you care about most.
To help with this, here's how the “E”, “S”, and “G” break down.
E is for environmental
Environmental factors consider conservation of the natural world, such as how much waste a company produces in their manufacturing process.
S is for social
Social factors focus on the way people are treated both inside and outside a company. This could include employee diversity or how well a company pays their staff.
G is for governance
Governance is all about how a company is run. An example of good governance would include a company whose board members were made up of a diverse mix of race and gender.
To expand on this, here are some of the other considerations that apply:
|Carbon emissions||Employee gender and diversity||Diversity of board members|
|Air and water pollution||Data security||Political contributions|
|Deforestation||Customer satisfaction||Executive pay|
|Green energy initiatives||Company sexual harassment policies||Large-scale lawsuits|
|Waste management||Human rights at home and abroad||Internal corruption|
|Water usage||Fair labour practices||Voting rights|
Due to the wide-ranging elements of ESG, responsible investing is highly subjective.
What matters most to you may be less important to someone else. This means that even when an investment opportunity is promoted as “ethical”, “sustainable”, or “responsible”, they may not end up matching your own ethics or investment criteria.
If you’re investing as a couple, make sure you discuss your values and beliefs. This will help you agree on your investment strategy and ensure your money is invested in a way that suits the values you each hold.
How are companies rated for ESG?
Public companies disclose ESG information voluntarily, so weighing up how ethically a company may be run can lead to material differences.
Fund managers rate companies based on ESG business practices, and their decisions may use positive screening or negative screening.
Positive screening assesses a company's ESG rating relative to their industry peers or other investment opportunities. They must also exceed a minimum ESG rating threshold. This can be determined internally or by a third party, and usually considers a range of ESG criteria rather than focusing on a single aspect or handful of issues.
Negative or “exclusionary” screening rules out or limits exposure to those companies or countries that engage in, or support, activities that investors wish to avoid. The goal of negative screening is usually to avoid co-profiting from or financing an activity that fails to support an investor's values.
Negative screening eliminates non-ESG companies and might include producers or manufacturers of adult entertainment, alcohol, firearms, fossil fuels, gambling, nuclear energy, and tobacco.
Beware of false promises
Because there isn’t an official standard for ESG investments yet, some firms have launched funds that fall short of what investors think they are buying.
This is called “greenwashing”.
Companies might give misleading information or funds may give a false impression of how environmentally friendly they are. This adds to the difficulty of deciding which investments best fit your personal criteria.
ESG labelling needs to be improved
The Financial Conduct Authority (FCA) is aware of this problem. Late last year, an advisory group, overseen by the FCA, met for the first time to discuss how ESG fund labelling could be improved. New proposals are expected by spring 2022.
With new regulation on the horizon, you may decide to wait until the FCA have completed their research before you commit your funds to ESG.
Will investing based on my values compromise potential returns?
The benefits of incorporating ESG investments into your portfolio are still being debated by many in the industry.
Some believe that an ESG strategy and doing good with your money you will deliver lower returns. However, research from Morningstar suggests that performance concerns may be unfounded.
In fact, the study, conducted during 2020, found that the majority of ESG strategies performed better than non-ESG funds over one, three, five, and 10 years. And, over the past decade, almost 6 out of 10 sustainable funds delivered higher returns than equivalent conventional funds.
ESG-rated companies can outperform over the long term
ESG can have a positive effect on both business financial performance and investment portfolios. Companies that score high on ESG also tend to be well-run businesses. Because they treat their stakeholders well, address their environmental challenges, and tend to have lower levels of controversy, many enjoy more conservative balance sheets.
Companies that are well-managed and consider long-term risks and opportunities around ESG issues can also outperform over the long term.
However, ESG factors are no guarantee of investment performance. As with any stock market investment, clients may still experience short-term volatility and there is always some risk involved.
We can help ensure your money is doing good
As the ESG market continues to grow, we're always working to keep up with the changes and find those funds that will put your money to work while doing good.
There is no one-size-fits-all solution and there are many ways you can incorporate sustainable objectives into your investment portfolio. It's also important to balance your values with your financial goals and risk profile.
In response to the rise in popularity and increasing demand for ESG investment solutions, we offer five different ESG portfolios. These portfolios focus on identifying companies with responsible and sustainable business practices. We believe that these businesses are positioned to deliver strong, consistent capital growth for investors.
To learn more about our approach to ESG investing, download our PDF guide that explains how we screen funds to decide if they are suitable investments for an ethical portfolio.
Get in touch
If you’d like to talk to us about ESG investing and how you can invest your money and do good for the world, please get in touch. Email firstname.lastname@example.org or call us on 0800 055 6585.
The value of an investment and the income from it may go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The contents of this article are for information purposes only and do not constitute individual advice.
The information contained in this article is based on the opinion of LEBC Group Ltd and does not constitute financial advice or a recommendation to any Investment strategy, you should seek independent financial advice before embarking on any course of action.Back to News & Views