What does ESG mean? Simply, ESG stands for Environmental, Social and Governance. In recent years, investors have been evaluating their investment strategy and are looking for funds that fit more closely with their ethical stance.
So, let’s look at ESG in more detail…
The environmental element is focused on the conservation of the natural world. That means energy efficiency, water scarcity, climate change and carbon emissions, air and water pollution, waste management, deforestation and biodiversity.
Looking after our natural world to ensure more of our animals don’t die out, and that we leave a better place for our children, grandchildren and beyond. If that is very important to you then seeking investment funds, that are invested ethically, to actively support the right activities will align with those goals.
But ESG investments are not purely about ticking the green box.
The social aspect is focused on the right way to treat people. That translates to human rights, labour standards such as child labour and modern slavery, employee engagement and not discriminating based on gender and diversity. It also means not investing in controversial products/services such as tobacco, arms manufacture, gambling or pornography. Demonstrating that a business cares and pursues high levels of customer satisfaction is usually a good sign. And, whilst this does cross over to governance, the way data is protected to maintain privacy for all stakeholders.
Governance focuses on the way a business is run. What is the structure of the board – is there true diversity? How are senior leaders paid – are salaries fair and equal for all? What is the stance on bribery and corruption? Is there an independent audit panel to oversee and evaluate whether the business is adhering to their own stated policies? How are staff protected – are there robust whistleblowing procedures? And does the company have any political bias, contributions to think tanks or political parties? Do they lobby on specific subjects? And, very topical in recent years, the way taxation is approached in individual countries where a business resides.
Having those values and caring about these really important areas of life is all very well, but how do you translate that into your investment portfolio?
Every day we seem to read yet another news story about an area of the world in crisis, an environmental disaster, or a company in trouble. Couple that with many of the leading banks and investment houses not always enjoying the best of reputations.
The answer is to look at investment funds geared specifically around meeting stringent ethical standards. They are regulated against their stated ESG standards to ensure they are doing what they say they are.
There are a variety of ESG investment funds available. Some focus on specific areas, some are broader. We recommend you consider what is most important to you, to ensure the funds you are considering marry up with your own moral code.
As with any investment, ESG investments are a long-term strategy. Whilst it is a myth that ethical investments do not perform as well as other funds, they are still relatively new, so we need time to assess long term performance. In recent years ESG investments have performed better than more traditional funds, but currently they are a little more volatile. There is less choice than the traditional investment funds, but there are still good opportunities out there, if this is the investment strategy you wish to pursue.
We are working with Asset Intelligence for some of our investors. You can find out more about their ESG investments by downloading this brochure: ESG Investments.
If you would like to discuss a more ESG focused investment strategy, please contact us on 01344 875 310.