It’s probably fair to say that in 2019, environmentalism is moving increasingly into mainstream public consciousness. People are now more concerned about how their behaviour, habits and even investments are impacting on the planet. To note just a few developments:
Whilst opinions may vary on the above events, demonstrations and productions in question, undoubtedly more British people are coming to accept the broad scientific consensus about humanity’s impact on climate change, and want to do something about it. Indeed, many are even asking how their money and investments can be put to responsible use in this regard.
Our Financial Planners can often start to talk about ethical investing with certain clients. Other broad, related categories on this subject include “ESG investing” (Environmental, Social & Governance) and “social impact investing”.
Here, we’ll be outlining what “ESG investing” looks like and what it tends to involve. Please note that this content is for information and inspiration purposes only. It should not be taken as investment advice or financial advice.
There is no doubt that different companies have a varying impact on the planet and human society. A financial planning business such as MGFP, for instance, is a service-based business. It does not have a supply-chain in the same way as a car manufacturer. Whilst both companies will produce a carbon footprint, the latter is likely to have a much greater direct impact on the environment due to the size of the business and the nature of their core product.
ESG investing is an approach to investing which factors in the impact of different companies and other assets upon our physical environment, such as their approach to pollution and consumption of natural resources. It also factors in the governance of these companies (e.g. their approach to anti-corruption and gender diversity on the company board), as well as their impact on the society they inhabit (e.g. wage fairness and corporate social responsibility).
It might surprise you to learn that ESG investing was quite a “fringe” approach to investing until recent years, as investor demands have brought it increasingly into the mainstream of investment management solutions.
There are many reasons for this, but among them include the fact that investor demographics are shifting. “Millennials” are growing as a target market of investment firms, and this group, in particular, tends to be very environmentally-conscious.
There is also the fact that many companies themselves have experienced considerable internal change with regards to beliefs about their ESG profile, as mounting evidence about climate change has accumulated over time.
There is also now increasing evidence to suggest that, with a viable strategy, ESG investments can offer investors attractive returns. This is gradually supplanting a common, previous belief widespread in the sector that ESG generally provides lower returns than non-ESG investments.
The important thing to recognise with ESG investing is that it is broadly intended to achieve two primary goals, simultaneously:
1/. Meaningful returns for the investor;
2/. Positive impact on the environment, governance and society.
To a degree, these two goals are in constant tension. Sometimes investors are tempted to sacrifice investment performance in the hopes of producing a positive sustainable impact. Whilst this is noble, it achieves little for your financial goals to lose money over the long term. Investing and charitable giving are called two different things for a reason.
On the other hand, there is also the temptation for investors (and fund managers) to chase after investment opportunities with a poor or dubious ESG profile, but which might offer more attractive potential returns. The more you go down this road, the more you dilute the definition of ESG and eradicate the second goal, above.
A good Independent Financial Planner will be able to help you navigate the world of ESG investing carefully with these two goals (as well as your own financial goals) in mind.
For some people, they might want to reconstruct an existing investment portfolio gradually, to include more ESG investments over time. This can help to reduce instability and risk in the portfolio, although some people might find such an approach in tension with their conscience.
Other people reading this article might be nearer the beginning of their investing journey and would like help setting up a portfolio which reflects their “ESG values” to a high degree, from the very outset. One of the challenges here will be establishing your financial goals and selecting an appropriate range of investments which can be justifiably labelled as “ESG”, and which also achieve an appropriate level of diversification, risk-minimisation and potential of return.
We have only managed to scratch the surface of ESG investing here in this article. However, we hope it has given you enough information to inspire you and help gather your thoughts on this increasingly important topic.
We understand some people will want to act quickly out of intentions to “make a difference”. Whilst this is completely understandable and noble, it is also important to look after yourself – and your loved ones – by not putting your capital at unnecessary risk.
If you are interested in discussing an ESG investment strategy with us, please do get in touch.