Environmental, Social, Governance (ESG) issues are a hot topic globally for businesses and investors, and although ESG Reporting is a fairly new trend, investing in ESG has been around since the 1960’s. It began as socially responsible investing – investors excluding stocks or industries from portfolios based on the activities of the business (such as tobacco production or being involved in the South African apartheid regime) but it is much more than that now and has expanded to include areas such as carbon footprint, diversity and remuneration.
As with any type of investment opportunity, there are pros and cons involved that need careful consideration. It’s not a ‘one-size-fits-all’ niche, and before you even consider investing, you need to determine what criteria your chosen fund(s) are using to define their ESG strategy, and whether their values align with your own. Some funds include ESG(Sustainable or Ethical) in their name, giving the impression they are making a positive impact to the world we live in. However as there are no agreed definitions for these words, when taking a close look underneath the bonnet you may be surprised where the money is invested. In extreme cases funds have exaggerated their own ESG credentials, this led to the term greenwashing.
It is essential to be clear on your own motivations and investment reasons – for some it is simple, their objective is to build a portfolio for investment growth and/or income. For others, they have the same aim, but also looking to achieve a specific goal (such as creating a portfolio with the lowest carbon footprint) or want to invest in opportunities outside of ‘industry giants’. ESG focused investment can provide a new approach. Its important clients understand that two ESG funds can have different underlying holdings as the aims and ESG screening process will vary between funds.
Unfortunately, there is no single universal rating system for each fund or stock to demonstrate their own ESG credentials, and it is very difficult to achieve this. The problem with rating providers is that evaluating ESG funds are complicated. Different agencies will place different weights on individual components. For example, they might put more emphasis on diversity (as part of the S in ESG) than on gender pay gaps. In short different analysts and providers will measure the same attributes differently and in turn give two companies different scores.
ESG investing is here to stay, with more focus on businesses disclosing ESG data and helping some funds align themselves to the United Nations Sustainable Development Goals. The process of developing research tools and identifying what companies are engaging with shareholders is likely to become more prevalent. ESG has also been associated with the term ‘The Trend of the Decade’, and flows into ESG funds doubled from 2020 to 2021 - this trend is set to continue.
As more companies realise the benefits of ESG Reporting and the FCA provide clear definitions on the terms Sustainable and Ethical, there will come a time when the process is more streamlined, which is likely to make researching and investing in ESG more transparent.
We believe ESG investing is a great option for clients. Whether it is ESG or a conventional investing approach, our process is the same. We always get to know our clients first, understanding what is important to them and their aims. This enables us to recommend and implement a great investment strategy.
I am off to Gran Canaria with the family for a week from the 11th August, whilst I am I am almost certain it won’t feel like a holiday with two children (Henry 6 and Holly 5), I am looking forward to it. I hope you are all having a wonderful summer, and enjoyed watching the lionesses roar to victory!!!!!!
This post is for information purposes and does not constitute financial advice, which should be based on your individual circumstances. The value of investments may go down as well as up and you may get back less than you invest. Your eventual income may depend upon the size of the fund, future interest rates and tax legislation. Past performance is not a reliable indicator of future performance.