ESG investing is on the rise in the UK and globally. If you’re thinking about incorporating personal values into investment decisions, it may be an area you’ve already looked at. But as with all investment decisions, it’s one that needs to be carefully weighed up.
First, what is ESG investing? It’s about looking beyond simply the bottom line and the return that investments deliver. Instead, three additional pillars are also considered – environmental, social and governance factors. That’s not to say that these replace the returns investments deliver, this is still a key consideration, but it’s not the sole factor when selecting where to invest. Instead, ESG investing will consider the environmental, social and governance impact is measured too, creating a ‘double bottom line’.
So, what do these three pillars cover?
Why are more people considering ESG investing?
The world has become more connected than ever. Understanding the impact companies, and therefore investments have, has become easier thanks to technology, even if the impact is many thousands of miles away.
ESG investing can be viewed as part of a wider trend of understanding the impact of the decisions we make. When shopping, it’s become more common to pick up Fairtrade or free-range products in line with personal views. ESG is about aligning your investment decisions with your values in a similar way.
On top of this, there’s a growing body of research that suggests ESG investing doesn’t mean lower financial returns. Of course, there are no guarantees when it comes to investment performance and it’s still important that you consider risk, goals and other factors as you would if you weren’t considering ESG criteria.
As a result, it’s not surprising ESG investment is growing. Whilst it still makes up a relatively small portion of the $6 trillion money market sectors, money market funds incorporating ESG saw assets rise 15% in the first half of 2019 to $52 billion.
How do you incorporate ESG investing in your portfolio?
For individual investors, there are two key ways to incorporate ESG investing in your decisions.
The first is through ‘negative screening’. This is where you’d avoid investing in certain industries or companies because you don’t agree with their operations or the impact they have. For example, you may choose to avoid companies that are involved in the arms or tobacco industries because of the harm they cause to society. Negative screening can also be used to screen out those companies that don’t operate in line with your values, for instance, those that have been found to have human rights abuses within their supply chains.
The second method is known as ‘positive screening’. Rather than avoiding companies, you actively look to support certain industries or business practices that align with your values. For example, you may choose to invest in companies that are at the forefront of developing technology to reduce carbon emissions or firms that build a strong, positive relationship with communities.
Let’s say climate change is a priority for you and it’s something you want to reflect in your investment portfolio. Negative screening may mean you divest from companies involved in fossil fuel extraction, whilst positive screening could mean investing a portion of your portfolio in firms pioneering renewable energies.
There are pros and cons to both approaches. Of course, you don’t have to decide between the two, you can blend negative and positive screening to suit you.
One thing to keep in mind when creating an ESG portfolio is that it’s a highly subjective area. What you deem a priority could be very different from someone else’s views. So, whilst there are now plenty of ESG or ‘ethical’ funds to invest in, you should take some time to assess the criteria used. In some cases, a compromise may have to be made but by understanding the criteria, you’re able to make an informed choice.
If you’d like to review your investment portfolio with ESG factors in mind, please get in touch. We’re here to help you understand how values can fit into your investment propositions whilst still keeping personal goals in mind.
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.
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