ESG investing is a category of investments that entails researching and factoring in environmental, social and governance issues, in addition to traditional investment evaluations, to seek a positive return and a long term impact on society.
Aligning Investments with Personal Values
You may hear ESG investing mentioned along with acronyms such as SRI – Socially Responsible Investing and SI – Sustainable Investing.
In recent years there has been an increasing demand to invest in companies that have a socially conscious approach and thanks to better information for decision-making and competitive returns, ESG investing is in the mainstream. It’s driven by individuals who embrace the idea that their investment objectives and personal values aren’t mutually exclusive.
The three central ESG factors are:
Environmental
Conservation & protection of the natural environment
Including:
- Waste and pollution
- Resource depletion
- Greenhouse gas emission
- Deforestation
- Climate change
Social
Relationships with employees, suppliers, clients & communities
Including:
- Employee relations & diversity
- Working conditions, including child labour and slavery
- Local communities; seeks explicitly to fund projects or institutions that will serve poor and underserved communities globally
- Health and safety
- Conflict
Governance
Standard for company leadership, risk controls & shareholder rights
Including:
- Tax strategy
- Executive remuneration
- Donations and political lobbying
- Corruption and bribery
- Board diversity and structure
Why is ESG Investing a growing market?
In today’s ever changing world investors are not only interested in the financial outcomes of their own investments, but also the impact their assets can have on global issues.
In reference to a 2006 study called Cone Millennial Cause Study, millennials are more likely to trust a company or purchase a company’s products when the company has a reputation of being socially or environmentally responsible.
It has been determined that many people are more inclined to turn down a product or service from a company perceived to be socially or environmentally irresponsible.
Does ESG compromise returns?
So does ‘being ESG’ compromise investment returns – the data would suggest not. Socially responsible investing has been around since the 60s and 70s, a time when shareholder value theory was popularised, the essence of that being that a companies’ only social responsibility was to maximize shareholder value, in effect make money for the people holding stock. It was considered by some that if you invested in an ‘Environmentally Friendly’ stock then there would be less returns.
Investment managers and investors now have more information on how ESG factors impact companies, which allows then to make better informed decisions. ESG investing may actually end up helping investors build an improved investment allocation as evidence suggests that incorporating EG factors leads to improved risk management.
Like any investment it is important to consider risks, term and accessibility needs of the investor but perhaps now is the time that this type of investment strategy will really start gaining momentum, so you may see a lot more of ESG.
For more information on ESG investing contact Blackdown Financial on 01823 321616, email enquiries@blackdownfinancial.co.uk or complete the form below.
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