ESG Investing

Environmental, Social and Governance Investing

Environmental, social and governance (ESG) investing is a way of investing your money ethically, responsibly and sustainably, ensuring that it is invested in companies that make a positive contribution to society.

When analysing stocks to decide whether they would be a good fit for your investment portfolio, our partners at Square Mile, an independent London-based research company, look at the environmental, social and governance aspects of a company, as well as the usual financial information.

Investing in Environmentally Responsible Companies

From the environmental perspective, companies suitable for ESG investing must demonstrate that they have made substantial progress towards achieving their environmental goals in a variety of areas including:

• The use of renewable energy, such as solar and wind power
• Recycling and sustainable waste disposal
• Reducing emissions of greenhouse gases
• Implementing climate change policies
• Developing, producing and selling products based on environment-friendly technologies
• Providing environmental programmes for employees, such as cycling to work schemes

Analysts look for companies that produce reports using internationally recognised environmental standards such as Principles for Responsible Investment (PRI) and the Global Reporting Initiative (GRI).

Some companies, such as Unilever, produce their own sustainability reports, showing their commitment to and progress towards meeting ambitious environmental targets.

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Investment in Socially Accountable Companies

From the social point of view, ESG analysts evaluate how a company treats its employees, customers, suppliers, local communities and society as a whole. Factors that are taken into account include:

• Inclusion and diversity within the hiring process
• Employees’ wages and staff turnover
• Sourcing raw materials ethically and responsibly
• Working conditions at suppliers’ factories
• Responsiveness to customers’ issues and complaints
• Product recalls
• Involvement with local charities
• Supporting projects that aim to reduce poverty or inequality on a global scale, such as Fair trade
• Taking a stand on social justice, human rights and other issues affecting society

Companies that meet social criteria may show how they are working towards achieving the United Nations’ 17 sustainable development goals.

Investment in Corporate Governance

The third aspect considered by ESG analysts is corporate governance. This relates to how the company is managed and is based on three pillars: accountability, security and transparency. Specific examples include:

• Inclusion and diversity when appointing directors and managers
• Executive compensation in line with the business’s results
• Whether large bonuses are given to directors when leaving the company
• Independence of the directors – if they are also directors of competing businesses, this can create conflicts of interest, for example.
• Transparent communication with shareholders
• Protecting customers’ personal information by preventing hacking, cyber attacks and other security breaches

Companies that do well in corporate governance are more likely to be trusted by outsiders, leading to a higher level of investment in the company.

What are the benefits of ESG Investing?

Apart from helping companies that make a positive contribution to society to grow, there are two other benefits of ESG Investing…

Potentially Higher Returns

Implementing ESG policies can give companies an advantage over their competitors. Innovative, environment-friendly processes can make a company’s operations more efficient and have a positive effect on its bottom line, thus delivering better returns for shareholders.

According to research by Morningstar, almost 60% of ESG funds delivered better returns than comparable, non-ESG funds over the past ten years. In the shorter term, in the first half of 2020, just over 41% of ESG and sustainable funds achieved returns in the top quartile, with a further 25% making returns in the second quartile, according to Trustnet.

There had been some doubt about how well ESG funds would perform in a market downturn. However, the first five months of 2020 has allayed fears that ESG funds would not perform well in such market conditions. Indeed, the opposite was true, with most ESG investments outperforming traditional ones. Trustnet discovered that the average Investment Association (IA) Global Fund with an ESG approach achieved a positive return of 1.77%, compared with a 3% loss for the average IA Global Fund.

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Reducing Risks

There are several ways in which ESG investing reduces risks for investors. From the environmental point of view, companies that take climate change seriously and have implemented measures to limit its impact are much less likely to be adversely affected by the economic effects of climate change in the future.

Similarly, companies that have introduced stringent security measures are much less likely to suffer the consequences of a severe cyberattack, including financial losses, high repair costs, and a detrimental effect on the company’s reputation.

Who are ESG investments suitable for?

ESG investments are suitable for the majority of investors. When investing in ESG funds, you can be sure that your money will only be invested in companies that are having a positive impact on the world.

With ESG funds expected to continue to outperform traditional investment funds, now may be a good time to switch some or all of your investments to ESG funds.

We offer friendly, impartial advice on ESG investments to individuals, trusts and companies.

Whether you are thinking of investing for the first time or considering switching some or all of your existing portfolio to ESG investments, contact us today to discuss your options.

Please Note - Free Advice extends only to the initial meeting, and thereafter any fees payable for services and advice will be agreed with the client.