ESG investing has taken this model and evolved, resulting in a variety of investment options to suit most investors.
What is ESG Investing?
ESG stands for Environmental, Social and Governance. These describe some of the factors that may be taken into account by fund managers when deciding whether to invest in a company.
ESG investing takes a more positive and inclusive approach to stock selection. Funds with an ESG mandate aim to invest mainly in companies which have a positive effect on society.
The companies selected will have strong credentials in one or more of the following areas:
Environmental
- Limiting waste and using resources effectively.
- Reducing pollution.
- Innovation in technology and green energy.
- Preserving natural habitats.
- Promoting the humane treatment of animals.
Social
- Prioritising employees’ health, safety, and welfare.
- Treating staff fairly and promoting equality.
- Dealing ethically with consumers.
- Contributing to the local community.
- Supporting charitable causes.
Governance
- Diversity and equality at all levels.
- Transparent leadership and financial management.
- Avoiding illegal activity.
A company may score highly in several of these areas, but fall down in others. The objective is not to invest according to strict criteria, but to seek out companies which have an overall positive impact.
Equally important is the investment potential of these companies. ESG investing does not unconditionally screen out companies with one or two red flags. Instead, the fund manager will weigh up the positive with the negative, and select companies with strong growth or income prospects. Investors can also use their voting rights to influence company policy.
Why Now?
There are a number of reasons why ESG investing has taken off in recent years, and is set to keep up the momentum in 2021:
- Increased awareness regarding climate change and pollution.
- Less social acceptance of wasteful or unethical practices.
- The sectors which are most suited to ESG investing have remained profitable throughout the pandemic, for example, technology, healthcare, and the financial sector. This has increased the level of interest and confidence in these sectors.
- On the other hand, the pandemic has restricted certain industries, such as travel. Furlough and home working have led to fewer cars on the road. We are already seeing reduced emissions, and many people are questioning whether life can (or should) go back to its previous frantic pace.
- Companies now have published ESG scores from a range of independent bodies. This means that at a glance, you can tell if a company has strong ESG credentials. Not only does this make it easier for the investor to assess the company, but it also makes unethical practices more difficult to hide.
As awareness of ESG investing increases, so does the demand. This leads to wider availability, and more acceptance of this investment style into the mainstream.
Reasons to Consider Sustainable Investing
You may wish to consider adopting an ESG approach to your portfolio for any of the following reasons:
- You are concerned about the environment, climate change, or human rights violations.
- You wish to support companies acting responsibly.
- You would like to contribute to efforts encouraging companies to improve their behaviour.
- You like the idea of investing in innovative companies and participating in technological breakthroughs.
- You believe that companies which continue to waste resources and act irresponsibly will be less profitable in the long-term.
Investment Options
If you would like to invest sustainably, there are a number of options available:
- Invest directly in shares. While researching companies is easier that it has ever been, dealing in individual shares can take a lot of work. Prices can be volatile, and frequent trading is usually counterproductive.
- Invest in sustainable multi-asset funds. This is a cost-effective option which means that the heavy lifting of stock selection, monitoring and rebalancing is taken care of behind the scenes. However, you can’t control the fund manager’s investment choices, and you may find that some of the companies chosen do not match your personal values. Funds are better suited to a general sustainable approach rather than strict exclusion criteria.
- Invest in a bespoke portfolio. Again, the day to day running of the investment is handled by a professional fund manager. The manager will take your views into account and can even exclude certain companies if you wish. This type of portfolio can be expensive and usually only offers value for money on larger investment values.
- If you are looking for a less volatile investment option, the new Green Savings Bonds set for release in 2021 could meet your requirements. These will be offered by National Savings & Investments, and will be used to fund environmentally friendly projects. Full details have not yet been released.
ESG investing has now moved firmly into the mainstream, and could be a worthwhile choice for your investment portfolio.
Please don’t hesitate to contact a member of the team to find out more about sustainable investment planning.
