SOCIAL AND GOVERNANCE (ESG) INVESTING
Generating the best outcomes by investing responsibly and sustainably
Once a niche approach thought to come at the expense of returns, Environmental, Social and Governance (ESG) strategies have proven that they can be market-beating. If you’re someone who wants to make a positive difference, you might be interested to know how you, your money, and the things you care about could all benefit from sustainable investing.
The pandemic has shown the planet’s fragility, complexity and interconnectedness in terms of demand and supply in trade and commerce and how these can be under threat if not sustainable.
ESG investing was already on a trajectory to reshaping the investment landscape, but the COVID-19 outbreak is now likely to quicken this reshaping pace.
Today, we see our world change faster than ever before, as economic, geopolitical and environmental challenges abound. And as investor momentum builds, some argue that companies can no longer afford to discount their ESG ratings.
A growing body of evidence also points to a relationship between sustainability initiatives and strong business results. A meta-study from the University of Oxford showed that companies with better sustainability practices tended to have better operational performance and often superior stock price performance relative to companies rated lower for ESG.
ESG abbreviation was first used in a 2004 report published by the United Nations called ‘Who Cares Wins’, which argued that the consideration of specific environmental, social, and governance factors in investment decisions could positively impact society as well as the financial markets. Since then, it has come to represent much more than a set of investment criteria.
ESG investment strategies, like any other form of investing, still come with risk. Meaning there’s a chance you may get back less than you put in. And remember that a sustainable investment should be seen as a medium-to-long-term commitment, meaning you should be prepared to invest for at least five years.
New generation of investors
Investors are increasingly aware that it is possible and increasingly necessary to make a profit while positively and proactively protecting people and the planet. We can expect to see a considerable demographic shift, with millennials citing ESG investing as their top priority when considering investment opportunities.
ESG integration spans all the asset classes, and various investment possibilities can achieve these goals. These include screening investments based on ESG factors, the use of investment vehicles designed to achieve specific ESG objectives (such as green bonds’) and making investments in companies that positively impact particular ESG issues.
What are ESG ratings?
ESG ratings are an objective evaluation of a company’s commitment to sustainable business practices.
A company’s ESG score is independent of the industry in which it operates. A specific stock can have a strong rating, even if the broader industry lags behind, and vice versa. For example, not all oil and gas companies have low ESG scores, while not all tech companies have high scores.
ESG scoring methods vary across sectors. E, S and G factors are given different weightings depending on the industry a company operates. The specific issues taken into account will also differ, determined by what is most relevant and material to company performance in each case.
Increasingly, investors are becoming aware that it is possible and necessary to profit while positively and proactively protecting people and the planet. They are making investment decisions after measuring the sustainability and societal impact of a sector or company.
The world is facing a rising tide of societal challenges, from the potential chaos associated with the breakdown of our climate to unsustainable levels of waste and pollution, as well as vast and growing social inequality. These events lead many investors to play a more pivotal role in directing capital to where it is most needed.
MAKING A DIFFERENCE AND A RETURN
Whether there are specific causes that you want to put your wealth to work for, or if you believe that companies that are run well will do well, we can help you find the approach that works best for you. For more information on our ESG approach, you may want to discuss or update your investment goals; please contact us.