What is ESG Investing?
ESG investing is a method of sustainable investing that looks at a company’s environmental, social and governance practices, alongside more traditional financial measures. Here, investors consider both an investment’s financial returns and a company’s corresponding impact on the environment (be it positive or negative) as a way of generating those returns.
Understanding environmental, social and governance (ESG) issues and trends helps Investment firms to both mitigate the risks that could impact their investments (by assessing a company’s ESG score) and help identify investment opportunities.
An investment’s environmental impact is important to many investors. This can involve avoiding fossil-fuel businesses such as the oil and gas industry or seeking to invest in companies that actively benefit the environment, such as renewable companies.
Companies that would have a negative impact on the environment in their daily operations are those that would contribute more towards:
- Resource depletion
- Climate change
The social component of ESG investing is focused on the impact a company makes on its customers, staff, and suppliers. This may include a company’s consideration towards diversity in the workplace, and their responsibility for the labor practices in the supply chain (for example in the retail and fashion industries).
Investors have the potential to influence these companies, and further shape our society to deliver a positive social impact by addressing issues like:
- Working conditions
- Modern slavery & child labour (Human rights)
- Employee relations
Investment Managers, and others looking to allocate capital, have a responsibility to hold companies to higher governance standards, to ensure the protection shareholder rights, disclosing information, etc.
The following factors are usually taken into account when determining a companies governance standards:
- Company Taxes
- Executive pay
- Board diversity
- Political influence
Why ESG Investing matters?
Impact investing is the process whereby businesses develop a program or projects or do something positive to benefit society. These can include putting money into ventures which don’t aim for a financial return, such as non-profits and charities.
As an investment strategy of impact investing, “Impact Funds” not only place a high priority on creating constructive social outcomes, they also generate decent financial returns for investors.
A Positive Impact
Nowadays, there is a growing number of investors that are commitment to a sustainable future, who would prefer their money to go toward stocks and responsible investments that will see them both generate a profit and reflect of their social standards and values.
As Financial Advisors, Investment Managers, Trustees, and the like we should to continue to deliver thought leadership and education for investors, companies, and stakeholders, to be a good corporate citizens to help foster responsible investments for the future.
How Investment Firms engage with Companies
- Research & Engagement: Ethical Fund Managers research company activities and measure them against internationally recognized social, ethical, legal, and environmental standards (taking into account human rights, the environment and anti-corruption, etc.). Analysts factor in ESG considerations within company analysis to identify all the potential risks and opportunities.
- Screening: As shareholders, they then engage with companies through active management, ethical screening, and collaboration. I.e., Screen companies out of the investment universe that fail their Sustainable and Responsible Investment criteria).
- Portfolio Construction: The Fund Managers would then collate these companies (or stocks) where their ESG Analysts provide an analysis of the ratings of the different types of ESG risks apparent, and construct a portfolio with a lower carbon footprint compared to the benchmark.
How do investors benefit from ESG Investing?
Growing evidence shows that over the long term, ethical funds can out-perform traditional funds.
Taking an example from Standard Life’s Global Equity Impact Fund against the MSCI ACWI this illustrates they are able to generate decent financial returns for investors.
The white paper by the Morgan Stanley Institute for Sustainable Investing study (in the US) found that sustainable funds consistently showed a lower downside risk than traditional funds, regardless of asset class.
The study found that during turbulent markets, as in 2008 and 2009, traditional funds had significantly larger downside deviation than sustainable funds, meaning traditional funds had a higher potential for loss.
More than $30 billion has flowed into E.S.G. funds over the last 20+ years, and given economies of scale, this has reflected a trend for Fund Managers to start reducing charges on ethical funds, additionally as a way of promoting responsible and ethical investing.
Companies like Standard Life have recently started launching their ESG funds, like the Standard Life Multi-Asset ESG Fund allowing individual investors to incorporate as part of their investment strategies and reap the long term rewards of ESG investing, commit to sustainable future.
Price and Risk:
|AMC Range||ESMA risk rating|
|Global Equity Impact Fund||NEW: 0.60 – 1.10%||5|
|Global Corporate Bond SRI Fund||0.40 – 0.90%||4|
|Multi-Asset ESG Fund||0.50 – 1.00%||4|
“The AMC (Annual management Charge) of the Global Equity Impact fund reduced from 1.35 to 1.10 in October, demonstrating that you should not have to pay a premium price for a fund that have the ultimate goal of trying to do good in the world, while providing investors with the opportunity to align their own values with their investment objectives.”
How to get started with ESG Investing?
Taking a responsible approach to investing is not about sacrificing returns, it is about delivering more sustainable returns over the long term and in turn securing the future.
If you need Financial Advice on how to get started with Ethical Investing, and want to know how to incorporate ESG & Impact funds into your Investment Strategy or Retirement Planning, contact our Smart Financial Advisors, and they will be able to guide you through the process.
When providing advice, Smart Financial considers the adverse impact of investment decisions on sustainability. As part of our research and assessment of products, we will examine the Product Providers literature to compare financial products and to make informed investment decisions about ESG products.
Smart Financial will at all times act in the client’s best interests and keep clients informed accordingly.
The consideration of sustainability risks can impact on the returns of financial products.
We are remunerated by commission and other payments from product producers. When assessing products, we will consider the different approach taken by product providers in terms of them integrating sustainability risks into their product offering. This will form part of our analysis for choosing a product provider.