ESG investing – what does it really mean and is it good for my money?

We are more aware than ever of how the choices we make can affect the environment and social wellbeing of the planet. And this concern has filtered into decisions about how and where we invest our money.

This mounting interest in investing with consideration for both the environment and towards social responsibility has led to a huge number of new ESG investment funds coming to the market.

There are now more than 343 sustainable investment funds available to UK investors. And Morningstar reported that 169 new ESG funds were launched during the first quarter of 2021 alone.

But what does ESG actually mean, and how do you know which funds are doing good for the planet? More importantly, can these funds also provide good investment returns?

Read on to find out everything you need to know about ESG investing.

ESG stands for “environment, social, and governance”

While ESG is the most popular term for ethical investing, other terms you may come across include “SRI”, or socially responsible investing, “impact investing”, and “ethical screening”.

Multiple labels can make it difficult to know where to start. This article focuses on ESG, so to help clarify things, this is how it all breaks down in business practices:

E is for environment

Environmental factors include climate change, greenhouse gas emissions, carbon footprint, water usage, biodiversity, renewable energy, and pollution and waste. An example you might consider when assessing a company’s ESG rating is how much water they use in their manufacturing processes.

S is for social

Social factors include community relations and labour policies, product safety, supply chain sourcing, and social impact reporting. If you want to ensure you’re investing in a company that cares about their people, you may want to seek one that pays more than the minimum wage or seeks to hire a diverse work force.

G is for governance

Governance factors include shareholder rights, diversity, business ethics, and transparency. An example of good governance practice would be a company with a diverse board or one whose founder doesn’t hold majority voting rights.

Decide what you care about most

If you’re interested in making sure you invest in companies that care about the world, start by thinking about what it is that most matters to you.

For example, if climate change is your top concern, you might decide to avoid investing in companies that manufacture fossil fuels or rely on such fuels in their manufacturing.

However, if you’re more concerned about the way a business treats their people, you may want to focus your attention on the social side of ESG and invest in companies who pay their employees well and ensure good working conditions.

Risks to be aware of before you commit your funds to ESG

Although the Financial Conduct Authority are making moves to regulate and standardise ESG funds, there isn’t yet an agreed-upon standard for evaluating ESG performance.

Without a measure that companies must adhere to, inconsistencies in ESG portfolios and funds are inevitable. For example, most people would be surprised to learn that Shell is listed as an ESG company; this is because they invest heavily in researching green energy solutions.

To be sure your ESG funds align with your values, learn how the fund screens its underlying investments.

New ESG proposals should be announced by spring 2022

In late 2021, an advisory group, overseen by the FCA, met for the first time to discuss how ESG fund labelling could be improved. With new regulation likely to be implemented, you may wish to wait until the FCA have completed their research before you commit your funds to ESG.

Waiting until there’s a more widely accepted measure companies must attain to gain a recognised ESG rating may help you avoid the potential of buying an investment that doesn’t truly align with your values.

Is investing in ESG good for my money?

ESG companies can perform better than non-ESG companies. Although research is limited, studies that have been carried out tend to show that ESG investing as part of a well-balanced portfolio can reduce risk and generate competitive investment returns.

In fact, a study, conducted by Morningstar in 2020, found that the majority of ESG strategies performed better than non-ESG funds over one, three, five, and 10 years. And research published in the Financial Times found that “close to 6 out of 10 sustainable funds delivered higher returns than equivalent conventional funds over the past decade”.

Some believe that this may be because a company focusing on ESG requires strong leadership. Since ESG initiatives rely on long-term strategies, a leadership team who can realise long-term outcomes – while successfully running the core business – is a competitive strength.

Remember, ESG factors are no guarantee of investment performance. As with any stock market investment, you may still experience short-term volatility and there is always some risk involved.

One of the most important aspects for long-term investment performance is having a well-diversified portfolio across different asset classes and geographies.

There’s a lot to take into consideration when approaching ESG investment. We can help you understand all your options and explain how underlying companies stack up with their ESG business practices. We’ll go through all the information and find a suitable approach to building your investment portfolio based on your values and long-term financial goals.

Get in touch

If you’d like to learn more about ESG investing and how you can invest your money and do good for the world, please get in touch.

Email hello@bluewealth.co.uk or call us on 0117 332 0230.

The content of this newsletter is offered only for general informational and educational purposes. It is not offered as and does not constitute financial advice.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Blue Wealth Ltd is an appointed representative of Best Practice IFA Group Ltd, which is authorised and regulated by the Financial Conduct Authority.