The buzz around ESG has risen in recent years as we have seen a move from a niche investment strategy to a mainstream part of investing.
Investments into Environmental, Social and Governance (ESG) strategies grew 42% from 2018 to 2020 and 2021 saw a record year of inflows with approximately $120 billion globally.
So what’s it all about?
Environmental: This concerns a companies interaction with the physical environment, and covers issues such as climate change, biodiversity/ land use, natural resources, carbon emissions, climate change risks, air and water pollution, raw material sourcing to name a few.
Social: Looks at the impact a company has on society and communities, including human rights, health and safety issues, labour standards, employee relations, product liability, privacy and data security, responsible marketing.
Governance: Focuses on how companies are governed, focusing on issues such as diversity, transparency, ownership, accountability, board structure, ethics, executive compensation, voting procedures and so on.
How does it work?
Fund managers will look at how a company interacts with the environment, society and how it is run to build a picture of the likely future financial performance.
The theory is that companies that don’t impact the environment, have a social conscience and are well governed will out perform other companies.
Fund managers will assess these issues and decide to invest with a view to improve returns. They will engage with the company to improve their ESG status and potentially their future financial performance.
Fund managers will do this by paying attention to ongoing company concerns such as:
- Its environmental impact
- Its energy efficiency
- How it treats its workers
- Whether it pays living wage
- CEO pay
- The company’s contribution to climate change and air pollution
There are of course many other considerations that fund managers will scrutinise before deciding to invest.
How can you get involved?
If you would like your investments to have a positive impact, there are many sustainable/ responsible funds now available which support ESG investment strategies.
Will I make less money with ESG?
There was some truth to this historically when ethical funds first came to market as these grew more slowly than standard alternatives, however this was largely because the ethical funds excluded the most damaging stocks like drugs and guns, which often were the most profitable.
Now, times have changed and many responsible funds have outperformed their standard alternatives.
Written by Alex O’Neill DipPFS, IFA at Beesure Ltd