Everything you need to know about ESG investing

The coronavirus pandemic and subsequent lockdowns have grounded planes, limited the number of cars on the road, and halted many non-essential heavy industries. Due to this, there has been a well-documented improvement in air quality.

There has been growing interest in ethical and green investing in recent years, partly due to increased awareness of environmental issues such as plastic pollution and climate change. The pandemic further helped this trend, with some socially conscious investors wanting to reward the companies which they feel handled the lockdowns in a responsible way.

If you want your investments to match your morals, read on to find out everything you need to know about ESG investing.

ESG is a set of standards to determine how ethical a company is

“ESG” stands for Environmental, Social, and Governance criteria. Essentially, it is a set of ethical standards to hold corporations to, in the hope of fighting negligent business practices.

ESG investments consider these criteria, on top of the financial prospects of an asset, when building a portfolio.

The idea of ESG essentially grew out of the philosophy of “ethical investing”, which screened out industries who were considered to have a harmful societal impact, such as tobacco manufacturers.

Since then, ESG investing has evolved and now aims to include companies based on desirable traits, not just excluding those with undesirable ones. Here are some examples of issues that this form of investing looks at when making a decision:

Environmental

When you hear the word “ESG”, environmental factors are probably the first thing that jumps to mind.

This criterion deals with conservation and pollution, aiming to ensure that the company is environmentally conscious. This tends to consider issues such as a company’s carbon footprint and energy efficiency.

Social

This factor considers the relationship between the business and the community that it operates in. Issues that investors may consider tend to focus on human rights, working conditions for employees, and customer satisfaction.

Governance

This category aims to assess the standards by which the company is run. This may involve issues such as the pay of executives, political lobbying, and the fair election of board members.

Increased interest in ESG investing

In recent years there has been an explosion of interest in sustainable investing. According to FT Adviser, the total value of ESG investments has risen by 34% between 2018 and 2020, making over £24 trillion in assets globally.

One explanation is that there is now a much larger awareness of environmental issues, due to more media exposure. If you’ve been paying attention to headlines in recent months, Greta Thunberg’s environmental activism may spring to mind.

Many ESG funds performed well throughout 2020 despite market disruption

While many people want to invest in a sustainable way, it can be difficult to shake the idea that green investing means you have to put up with smaller returns. Thankfully, studies have found that this isn’t always the case.

An analysis by investment research firm Morningstar found that over a ten-year period through to 2019, 58.8% of sustainable funds managed to outperform their traditional peers across seven different categories.

Furthermore, in the US large-cap equity category, seven out of ten sustainable funds saw greater returns than their traditional counterparts.

This study shows that ESG funds can be just as profitable as traditional ones, with the added potential benefit of being more sustainable too.

ESG’s focus on sustainability has worked to its benefit during the pandemic

One of the main reasons why ESG funds have performed well during the pandemic is their focus on sustainability.

The pandemic has impacted on many aspects of our daily lives, such as disrupting businesses and reducing the number of cars on the road. This is what made many investors realise the importance of sustainability.

For example, the pandemic dramatically reduced the demand for fuel as many businesses were closed and there were less people travelling by car. As a result, the price of oil fell.

Previously, many investors had seen the energy sector as a reliable investment, but the pandemic has highlighted that it isn’t as robust as people may have thought.

It also proved that ESG funds could be a much more reliable investment choice than previously thought.

According to Fidelity’s ‘Putting Sustainability to the Test’ report, published in the FT Adviser, stocks with a higher ESG rating tended to be less prone to market volatility. This means they fell far less when markets collapsed in early 2020, but also rose less when they recovered.

Furthermore, the report also highlights that stocks with a higher ESG rating typically outperformed those with lower ratings in every month from January to September, with only one exception.

The resilience of ESG funds during the financial crash caused by the pandemic has made many investors realise that they can be much more reliable and profitable than previously thought. This may mean that there will be a further increase in sustainable investing in the future, as people realise that aligning their investments to their ideals can have its rewards.

Get in touch

If you want to know more about ESG investing and what it can do for you, we can help. Email enquire@london-money.co.uk or call us at 0207 808 4120 to find out more.

 

Please note:

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.