The concept of investing in an unethical company can put off many people who do not wish to support immoral practices.
However, there are many ethical concerns which can be eliminated through careful research to ensure that the company is only using the funds for their intended purpose.
Another standard currently rising in popularity is the trend of investing in a company which upholds ethical investment principles at every corner of their company structure and actually strive to promote ‘good’.
Although there are very few companies which can claim to be completely ethical, there are a select few who have caught the attention of the ethical investment world and have been recognized for going above and beyond.
One of the ways you can get to know who these companies are is by asking your financial advisor about ‘ESG Investing’.
What is ESG Investing?
While Ethical Investing has been around for some time, ESG is a more broad-based approach to investing.
ESG stands for Environmental, Social and Governance.
Simply put ESG investing takes a more holistic approach to investing by incorporating Environmental, Social and Governance factors into the investment process. It means investing in funds that seek out companies who look after their employees, their communities and the environment.
What are the benefits of ESG investing?
Pioneering work by researchers like Harvard University’s Professor Michael Porter has shown that there is a very strong link between a company’s financial performance and their social and environmental behaviour. In fact, many studies have shown that companies with stronger ESG credentials actually outperform those without. This is especially true when looked at from a long-term perspective.
In the same way, researchers including Swiss Re’s Dr Elisabeth Guggenberger have shown that companies with high ESG credentials sustain far less damage when they face an economic or natural disaster, meaning their financial performance recovers much faster after such events.
An Investment Manager uses the ESG criteria in addition to traditional financial criteria when deciding whether they will invest – or not as the case may be!
What Factors does ESG Investing Consider?
The goal of ESG investing is to ensure sustainable long-term investing that prioritise financial returns alongside a company’s impact on the environment, stakeholders and our planet.
Broadly speaking it breaks down Environmental, Social and Governance factors as below:
-How does a company interact with the Environment?
– Sustainability of supply chains
– Greenhouse Gas emissions
– Renewable energy used & waste generated
-How does a company interact with its workforce?
– Employee relations
– Diversity Inclusion
– Local community investment
– How is a company structured?
– Accountability Transparency
– Board of Directors quality
– Anti Money Laundering policies
-What other kinds of business is the company involved in?
-Is it ethical and responsible?
-Does it avoid certain types of investments such as weapons, alcohol or tobacco
Research has shown that ESG investing was spurred on by the Millennial Generation, but now more and more investors are becoming more conscious and wish to consider ESG factors when investing.
Can a millennial investor as part of an ethical portfolio, become profitable?
The answer is yes.
ESG funds have shown to be resilient during economic downturns, which has led to an increase in the number of investors investing in ESG strategies.
ESG investment has led to an average of 1% higher return per year over the past 10 years.
They also strive to be efficient by nature.
These companies are more diligent in how they employ their workforce, if one factor for example is off, say environmental impact, it will be reflected in the company as a whole, as they have been made aware of their so called ‘weak spot’
A good example is L’Oréal who have taken great strides to reduce the environmental impact of their factories.
Research from MorningStar has shown that incorporating an ESG approach into your investment philosophy has great potential to improve returns. During 2020, 59 of the 69 ESG screened indexes from MorningStar outperformed their broad market equivalents, while 88% outperformed for the five years to the end of 2020.
The effect of ‘Climate Change’ has been cited as the main concern of many investors. Investors look for investments where they benefit from strong financial performance, but which also enable them to buy investments that align with their own personal values and priorities.
New legislation was introduced by the EU earlier this year in this area under the EU Action Plan for Financing Sustainable Growth. It applies to financial services providers in Ireland through the implementation of local legislation and regulation with the aim of supporting sustainable growth and economies.
The Future of ESG
ESG is here to stay and that can only be a good thing. Investors will be able to influence the behaviour of the largest and most powerful multinational companies in the world, for the greater good.
When ESG is considered as part of your portfolio it can help you reduce portfolio risk, generate competitive investment returns and help you feel good about the funds you invest in.
ESG are particularly useful as part of a long-term strategy and it is expected the ESG will be incorporated to most multi-asset types of funds. The ESG factor has been applied to a wide range of strategies and is no longer considered niche. Consensus is that ESG will play an increased role in portfolios going forward, for example for investors seeking a sustainable approach to the environment or a focus on diversity.
Do you want to use your money to drive positive change? Do you want to invest in a more sustainable future?
Do you feel uneasy about products that do not take into account their impact on the environment and society?
If your answer is ‘yes’ to these questions, then investing in an ESG-integrated fund could be worth considering.
If this is something you would like to explore and know more about, send us a direct message or email firstname.lastname@example.org