When it comes to sustainability, we can all do our bit by recycling, cutting food waste, switching to low carbon energy, and planting green spaces. Increasingly investors are also looking for ways to contribute to sustainability when making their money grow. While sustainable and responsible investment was once a niche, it has become mainstream. Investing in companies which have a business plan based on environmental, social and governance (ESG) principles makes sense, not just for the planet and society, but potentially for your pocket too.
There are different approaches taken and while more choice can be good, it can also be confusing. How these differ and how we are developing our investment services to provide good outcomes on a wider scale is explained.
The aim here is to avoid investing in “sin stocks” -companies profiting from products that are considered potentially harmful such as gambling, tobacco, arms manufacturing, animal testing and adult entertainment. Most ethical funds will also make sure that they are not investing in companies involved in deforestation, intensive farming or operating under regimes with poor human rights.
The problem for investors in applying this method of investment exclusion is that it involves constructing a bespoke portfolio. This often means that the cost of investing is higher. It prevents participation in more broadly based investments which may mean higher volatility and risk is experienced, through lack of diversification.
This approach may satisfy concerns about particular activities, but it does not include monitoring the impact of companies whose activities may not be so obviously harmful, yet could result in poor environmental and societal outcomes, or conversely, benefit from tackling these problems.
Environmental, Social and Governance (ESG)
This measures companies’ overall performance, including their environmental impact, social responsibility, and corporate governance. It assesses the threats and opportunities which these issues present to the business, rather than values-based exclusion of companies or sectors.
Each company or investment fund can achieve an ESG score which reflects the positive and negative contributions which the business makes in each of these areas. These range from AAA to CCC with companies and funds which receive a rating of AAA or AA scoring highly and CCC to be avoided.
In addition, a controversy score seeks to avoid investing in companies which may suffer loss of revenue or face fines or compensation claims. Examples could include a retailer exploiting a supply chain which does not pay the minimum wage, a bank losing sensitive customer data, an airline refusing to refund cancelled flights, or a manufacturer’s product safety recall. While a controversy could be a minor blip, it can also be indicative of ESG failings in the culture of a business.
ESG Ratings of our Governed Portfolios
Our range of risk rated portfolios are overseen by our Investment Committee. All these portfolios have been screened by our third-party research partners in accordance with ESG principles. Our ESG portfolio has achieved an AA rating, the second highest on the AAA to CCC scale. All our other portfolios have achieved an A score. This means that whatever the risk profile of investors or the time frame over which the investment is to be held, we can offer an investment solution which ranks highly for its adherence to ESG principles but still benefits from more governance than is possible with a bespoke portfolio.
In the last 5 years, since ESG investing principles have been more widely applied, research by UBS published by Bloomberg shows the annualised returns from ESG focussed portfolios have outperformed the index in all markets except emerging markets. 1 This provides some evidence that doing good with your money does not mean having to sacrifice returns. While 5 years is a relatively short period, we believe that businesses which are taking account of long -term challenges are more likely to prosper.
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1. UBS MSCI ETF Indices published by Bloomberg Finance LP- December 2020.
The information contained in this article is based on the opinion of the author 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.
The value of an investment can go down as well as up. Past performance is not a guide to future performance.
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