Today, more than ever, we are conscious of how our life choices affect the environment and social wellbeing of the planet. For many, this concern is extending to how and where we invest our money.
The rising interest in investing with consideration for both the environment and towards social responsibility has led to a huge number of new ESG investment funds coming to the market.
According to a report published by Vox, there are now more than 800 registered investment companies with ESG assets. Meanwhile, Bloomberg predicts that global ESG assets will exceed $53 trillion by 2025. This sum represents more than a third of the $140.5 trillion in projected total assets under management.
But what is ESG investing all about, and how do you know which funds are good for the planet? And, most importantly, does investing with an ESG strategy deliver good returns on your money? Read on to find out.
ESG stands for environment, social, and governance
Although the environmental aspect of ESG gets the most attention, ESG investing isn’t only about protecting the planet.
While environmental factors look at the conservation of the natural world, social factors examine the treatment of people both inside and outside the company, and governance factors consider how a company is run.
While ESG is the most popular term for ethical investing, other terms you may come across include “SRI”, or socially responsible investing, “impact investing”, and “ethical screening”.
Multiple labels can make it difficult to know where to start. This article focuses on ESG, so to help clarify things, this is how it all breaks down:
E is for environment
Environmental factors consider how a company affects the planet. This could include:
· Climate change policies
· Greenhouse gas emissions
· Carbon footprint
· Water usage
· Waste disposal
· Renewable energy usage
· Recycling practices
· Employee incentives, for example, carpooling initiatives, commuting by bike, etc.
S is for social
Social factors look at how a company treats their employees, customers, consumers, suppliers, and the local community. Social factors could include:
· Employee treatment
· Employee compensation
· Employee training and development
· Employee safety policies and sexual harassment prevention
· Diversity and inclusion in hiring, promotions, and pay increases
· Ethical supply chain sourcing
· Customer service performance
· Consumer protection activity, including lawsuits, recalls, and regulatory penalties.
G is for governance
Governance considers how a company is run. An example of good governance could include a company whose founder doesn’t hold majority voting rights. Other governance considerations include:
· Executive compensation, bonuses, and perks
· Policies that define and enforce ethical business practices
· Diversity of the board and management team
· Whether term lengths differ among board members
· Separation of the chairman and CEO roles
· How board votes are decided – by a majority or by who receives the most votes
· Transparency of shareholder communications.
Decide what you care about most
If you’re interested in making sure you invest in companies that care about the impact they have on the world, start by thinking about your values and what matters to you most.
If the environment is your primary concern, you might want to make sure you’re investing only in companies that are making efforts to reduce their carbon footprint or reduce the amount of water needed in their manufacturing process.
Alternatively, if you’re more concerned about the way a business treats their people, you may want to focus your attention on the social side of things and divert your funds towards those companies who pay more than the minimum wage and ensure good working conditions for employees.
Will investing in ESG deliver good returns?
Research is limited, but studies tend to show that ESG investing as part of a well-balanced portfolio can reduce risk and generate competitive investment returns.
In 2020, research by Morningstar revealed that the majority of ESG strategies performed better than non-ESG funds over one, three, five, and 10 years. The Financial Times has also reported that “close to 6 out of 10 sustainable funds delivered higher returns than equivalent conventional funds over the past decade”.
Companies that score high on ESG tend to treat their stakeholders well, tackle their environmental challenges, and have lower levels of controversy. This all means that, to succeed, they must also have strong leadership and so they are usually well-run businesses.
Since ESG initiatives rely on long-term strategies, a leadership team who can realise long-term outcomes – while successfully running the core business – is a competitive strength.
Remember, ESG factors are no guarantee of investment performance. As with any stock market investment, you may still experience short-term volatility and there is always some risk involved.
We can all do our bit to help look after the environment
If caring for the environment is your greatest concern, adjusting your lifestyle to adopt greener habits in your day-to-day life can also help. In some cases, you may find that reducing your carbon footprint helps the environment more than holding an ESG investment portfolio.
Recycling, reducing your use of plastic, buying unpackaged, fresh, seasonal produce, and switching to cycling or walking instead of driving for local trips can all add up and make a real difference.
How we’re doing our bit
Helping to reforest the world
We plant a tree every time we take on a new client. Since signing up to the Tree Nation initiative, we have planted trees in Bolivia, Madagascar, Tanzania, France, and Nepal.
Net zero website
We also operate a net zero website that automatically compensates for all the CO2 emissions the site generates. By measuring the website usage and calculating its related emissions, a clever algorithm knows how many trees we must plant to offset these emissions. Since launching this initiative, the number of page views we’ve had means trees are already being planted.
Aiming for B-Corp status
As you can see from our commitment to our zero-carbon initiatives, we are paying attention to the impact we have on the planet. Our energy use within the business, recycling policy, remuneration structure, investment philosophy, employee benefits, exam policy, and involvement in our local community are all in our focus. All of which will add up to help us attain B Corp status in the next 18 months or so.
Get in touch
There’s a lot to take into consideration when approaching ESG investment.
One of the most important aspects for long-term investment performance is having a well-diversified portfolio across different asset classes and geographies.
We can help you understand all your options. We’ll go through all the information and find a suitable approach to building your investment portfolio based on your values and long-term financial goals.
If you’d like to learn more about ESG investing and how you can invest your money and do good for the world, please get in touch. Email enquiries@alexanderpeter.com or call us on +44 1689 493455.
Please note: The content of this newsletter is offered only for general informational and educational purposes. It is not offered as and does not constitute financial advice.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
