ESG – The Investment Trend to Watch
In the fast-changing world, a forward-looking approach is more likely to delivery sustainable return to invests and positive impacts on the world in the long term.
We believe ESG factors will increasingly affect the ability of companies to operate and generate returns, today and over the future.
What is ESG investing?
ESG investing is the consideration of environmental, social and governance (ESG) factors, alongside financial factors, in the investment decision-making process.
There is no one exhaustive list of ESG examples. ESG factors can often be measured but it can be difficult to assign them a monetary value.
Some of the ESG factors:
Environmental – Conservation of the natural world
- Climate change
- Greenhouse gas (GHG) / carbon emissions
- Resource deletion, including water scarcity
- Waste and pollution
- Deforestation
- Energy efficiency
- Biodiversity
Social – Consideration of people & relationships
- Community relations
- Employee engagement
- Data protection and privacy
- Gender and diversity
- Human rights
- Conflict regions
- Health and safety
Governance – Standards for running a company
- Board composition
- Bribery and corruption
- Executive compensation
- Political lobbying and contributions
- Tax strategy
Why does ESG matter?
Many investors, including pension funds, charities and endowment funds, conscious that funding our retirements, financing societal initiatives, and contributing to the cost of education, can give them a function within wider society.
With this responsibility comes influence. These investor groups manage significant pools of capital; directing this capital gives them a substantial amount of authority. They decide how and where they want their funds allocated and can choose to favor investments that aim not to have a negative effect on society, or those targeting a positive effect.
At the same time, the other major philosophy behind ESG is for risk management.
Investors incorporate ESG factors into their investment decision to mitigate risk. For example, an investment in a company with low ESG standards could expose the portfolio to a variety of risks faced by the company in the future, such as worker strikes, litigation and negative publicity, resulting in lower future returns. For investors, monitoring the ESG credentials can lead to better risk-based judgements.
In fact, this is not a divergence from the traditional principle of return maximization but an evolution.
ESG investing’s beginnings were largely based on exclusion – avoiding the asset classes and sectors deemed to have a negative effect on society – however in recent years it has extended to modern-day activism, where investors directly intervene to enact positive change.
Today, ESG is considered by some as an asset class and an investment approach in its own right. Let’s unlock the potential of ESG together