ESG Investing: An Overview

In today's world, investing is not just about making money; it's also about making a positive impact.

Over the years Ethical Investing has allowed for investors to align their money to their morals. It is rooted in the idea that your investment choices can be a force for good and consciously avoids investing in certain sectors, such as tobacco and arms. This style of investing, although ticks the box for social conscience, has historically come with significant limits on where and how you can invest. It is also a very subjective strategy as what one person deems as ethical, might not be the same as another. Depending on how strong your views or how ‘green’ you want to be, investment opportunities can be significantly reduced. This can make investment returns limited. To balance the aim of personal gain with the instinct to invest morally, we have seen the emergence in recent years of something different, although similar, to old school ethical investing; ESG Investing.

Note: No investment is without risk. This article is a basic overview of what ESG investing is and not a recommendation of action. For guidance personalised to you please speak with a qualified financial advisor.

ESG stands for Environmental, Social and Governance.

ESG is an investment framework that aims to support companies and projects that promote sustainable practices, human rights, and ethical governance while avoiding those that engage in activities that harm society or the planet. This approach goes beyond traditional financial analysis and considers the ethical, social, and environmental impact of your investments.

Companies are given an ESG score which takes into consideration certain criteria:

Environmental: Relates to how well a company or country contributes to the preservation of the natural world. This includes issues like climate change, waste, pollution, and consumption of natural resources.
Social: Measures a company or country’s relationship with customers, employees, suppliers, and local communities. This includes issues like human rights, data protection, customer satisfaction and diversity.

Governance: Focuses on how well aligned a country or company is to the needs of their stakeholders – includes issues like whistle-blower schemes, corruption, lobbying, board composition and compensation.

The main driver behind ESG investing is that companies who positively consider the environment, have a social conscience and are well governed should, over the longer term, outperform other companies. While Ethical investing focuses more on moral or ethical issues than investment considerations, ESG looks to balance financial analysis with moral code. That said, the majority of ESG funds tend to exclude or significantly reduce exposure to companies such as weapons manufacturers and tobacco firms who are the traditional pariahs of the ethical investment universe.

Developing ESG Portfolios

ESG funds typically adopt both a positive and negative screening approach when deciding what companies to invest in and whether the companies fit the criteria of ESG investing.

Negative screening involves excluding companies or industries that do not meet specific ethical criteria. Positive screening, on the other hand, focuses on actively seeking out companies with strong environmental, social, and governance (ESG) performance. As example of using both approaches together, companies that are involved in the production of chemical weapons will automatically be excluded from the selection process, but companies that strive to meet the highest ESG standard may be included within the selection process.

Given the necessary active decisions needed to exclude companies from the investment process whilst including others, investors often end up paying higher fees for ESG investing given the initial & ongoing assessment of a company’s ESG credentials.

Why Consider ESG Investing

Money can be a force for good or a force for evil. Given the state of today’s world and the desire to improve it for future generations, investors are finding it more important to use their privileged financial status for the betterment of humanity. Since ESG takes into account the impact a business has on all aspects of it can help give the sense that you are working towards the legacy of a better tomorrow.

Unlike pure Ethical Investing, ESG portfolios might hold shares in a company which operates in a space that some might deem as unacceptable, such as fossil fuels. Though this might seem counter to the nature of the framework, the point must also be made that if you are not invested in a company, you have no voice in their actions. Change begins from the inside and shareholders have access and influence over business practices and decisions that can help improve the ethical operation of a company.

There is also the belief that companies with a strong ESG rating will have longevity and continued growth potential. Not only because their practices are theoretically more sustainable but because the perception of those businesses is favourable. When a person believes in the ethos of a brand, they are more inclined to be loyal to it. Loyalty leads to continued engagement. Continued engagement leads to increased profit. Increased profit leads to higher company value. A higher company value leads to a higher share price.

Putting Your Money Where Your Morals Are

ESG investing represents a significant shift in the world of finance. It offers investors the opportunity to align their values with their investment goals. As the world faces pressing environmental and social challenges, the ESG framework provides a means for individuals to contribute to positive change while growing their wealth. It’s a compelling way to not only invest in the future but to help shape it, one investment at a time.

As with all investing, ESG is not without risks. If you are curious to know more about ESG investing, or if you would like to see how this method will impact your portfolio, get in touch with the team at Bigmore Associates. Our ESG Investment Proposition is built on the same three pillars as our Core Proposition; highly diversified funds that are risk rated with a lower investment cost.