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Investing in the future: What is ESG investing?

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Last updated: December 8, 2022

Sustainable investing is on the rise. More and more of us are thinking specifically about where our money is invested. Not just in terms of the reward, but in terms of the good it can do. As consumers demand ethical practices from the companies they purchase products or services from, they are also expecting them from those they invest in. 

An intro to sustainable investing 

Have you heard of ESG investing? ESG stands for Environmental, Social, and Governance. It refers to the three key factors when measuring the sustainability impact of an investment in a business or company. ESG criteria are used to screen investments for inclusion or exclusion within a portfolio. Climate change, fair labour, diversity, and inclusion are just some of the factors that spring to mind. These are all considered within ESG funds. 

More detail on sustainable investing criteria

The terms environmental, social, and governance encompass a lot of topics. The below factors are all reviewed when deciding if a company fits the ESG portfolio. The aim is to select companies that are reducing their impact on the planet’s natural resources, improve relationships with stakeholders, and reduce risk through board oversight and controls.

Environmental

  • Air & Water Pollution
  • Biodiversity & Deforestation
  • Climate Change
  • Energy Efficiency
  • Waste Management
  • Water Scarcity

Social

  • Community Relations
  • Customer Satisfaction
  • Employee Engagement
  • Gender & Diversity
  • Human Rights
  • Labour Standards

Governance

  • Audit Committee Structure
  • Board Composition
  • Bribery & Corruption
  • Executive Compensation
  • Lobbying Activities
  • Political Contributions

How does socially responsible investing fit into my financial plan?

Some have commented that ESG investing is ‘another bubble waiting to be popped’, merely a trend. In our opinion, that couldn’t be further from the truth. The term was coined by the UN and Swiss Government in 2004, so it is a fairly new concept. However, the performance so far is consistent and promising. 

​​The below chart from EBI compares a range of Morningstar (who provide investment research and investment management services) Indexes to their ESG counterparts since their common inception (minimum three years to 31/10/2019). You can see that the ESG version of the index has outperformed in each asset class.

Source: https://ebi.co.uk/esg-performance/

One debate is that ESG funds could potentially outperform consistently, thanks to the new reality of climate change and the push for low-carbon business growth. That said, there’s also an argument for some underperformance because high ESG-rated firms are investing heavily in sustainability rather than reporting high profits.

The most important thing to consider here is risk. ESG firms may have lower risk as they are preparing for the future and moving to become resilient amongst crises such as climate change and COVID-19 (not that we are wishing for another pandemic!). At Stephen Eve, we’re big believers in choosing the right fund based on your attitude to risk, balancing this vs. expected returns so you are comfortable with where your money is invested. In that sense, it’s useful to weigh up the pros and cons of ESG funds as an option. 

How do I know that ESG investing is legitimate?

‘Greenwashing’, where companies exaggerate their sustainability efforts or mislead consumers into thinking they are eco-friendly, is a concern. A good example of this is when a company labels itself carbon neutral but, rather than working to reduce emissions, offsets a high level of carbon footprint via other activity e.g. planting trees. 

 EBI (Evidence Based Investing), whose ESG funds we use, are tackling this by analysing evidence that companies are behaving ethically. They consider: 

  • Does the company in question back up its claims with data?
  • Have they institutionalised sustainability within the company?
  • Do they have a board or committee that monitors and reports on green issues?
  • Are they achieving their targets easily, or finding it difficult to meet them? Looking at the targets the company sets for itself can tell a story. 

EBI fund managers push back on companies that are overstating their ‘green’ credentials.

Socially responsible investing - the conclusion

Like with any form of investment, ESG has its own benefits and challenges. There is a diverse range of ESG funds out there and the key to success is finding the solution that works for you. As always, a long-term approach is sensible as, although markets are up and down, the real growth comes over years not months. (Our blog post on Markets & Volatility explains this in more detail if you’re interested.) 

The end goal of wealth management is the freedom to enjoy life so you need to ensure your funds are meeting your goals, even if they are invested ethically. That said, if you can tick two boxes at the same time, it’s a win-win.

If you're interested in finding our more about ESG investing, we'd happily have a chat over the phone or video call.

This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth.

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The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.

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