Responsible investing – once seen as a niche area of investment – has moved into the mainstream lately.
High-profile figures such as David Attenborough and Greta Thunberg have raised public awareness of issues such as climate change and plastic pollution, and societal shifts have raised issues of equality and social justice.
One effect of this has been an increased awareness of the importance of aligning our financial decisions to our values.
A recent This is Money report confirms that 65% of UK investors now see responsible investing as a priority. Just 35% of those surveyed saw themselves as “traditional” investors, focused only on financial returns.
The coronavirus pandemic has also helped to speed up a trend that was already in place.
Decreased air pollution during the first UK lockdown refocused attention on green issues, while media scrutiny targeted at big firms’ treatment of staff highlighted increased interest in companies’ social conscience.
According to recent figures published by MoneyAge, the pandemic has been a crucial factor behind more than half (53%) of advised UK adults stating that they want to move their investment into ethical or sustainable funds.
One type of socially aware approach, that has become synonymous with the whole of sustainable investing, is ESG investment.
ESG investing focuses on environmental, social, and governance issues
ESG investing is a specific form of responsible investment that prioritises a company’s approach to environmental, social, and governance issues.
Fund managers might focus on businesses with a low carbon footprint or who can evidence their attempts to keep their processes sustainable. They might also prioritise companies seen to treat their staff well, that have a good gender balance within their workforce and board members, or who are actively transparent in their business dealings.
Equally, ruling out companies that fail in these areas – such as tobacco or palm oil manufacturers – might ensure a portfolio’s ESG credentials.
Reasons to invest in ESG funds
There are many compelling reasons to include ESG investing as part of your overall financial plan. Here are three of them:
1. ESG investment fared well during the pandemic
ESG investing – and responsible investing as a whole – was once seen as a niche area of the investment market. This was at least partly down to a belief that you couldn’t align your investments to your values on social issues without sacrificing financial returns.
And yet ESG funds fared well during the pandemic. In fact, figures quoted in FTAdviser last year found that funds with a high ESG rating outperformed their lower-rated counterparts every month from January to September 2020, apart from April.
Morningstar, meanwhile, found that 75% of their ESG-screened indexes outperformed non-ESG equivalents in 2020, with 88% performing better over the five years to December 2020.
While ESG fund performance for 2021 so far hasn’t always managed to match these heights, there are reasons to be hopeful for its long-term prospects.
2. The future looks bright for ESG investing
Impressive investment returns for ESG funds in 2020 went hand-in-hand with increased inflows. FTAdviser confirms that inflows for the first three quarters of 2020 had quadrupled compared to the same period the previous year. ESG investing looks set to remain popular in 2021.
The continued prevalence of environmental issues in news headlines – from the G7 and COP26 summits to Joe Biden’s America re-joining the Paris Agreement – will help ensure continued inflows. As will the social disparities highlighted by the pandemic.
Continued investor interest is likely to lead to more funds becoming available and greater scrutiny of the market in a bid to limit the impact of “greenwashing” – the process by which companies claim to be more ethically, environmentally, and socially engaged than they are.
3. Boolers can help you align your investment choices with your values
Putting the right financial plan in place for you means understanding your long-term goals and helping you achieve them.
It is also important that your plan aligns with your values and beliefs around key environmental and societal issues. With this in mind, stay tuned for news of Boolers’ newly developed ESG portfolios, more on which, coming soon.
Get in touch
In the meantime, Boolers are here to help you achieve your goals and manage your pensions and investments, so get in touch. If you would like to discuss any aspect of your financial plans, please contact us today.
The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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