What is ESG Investing and Does it Work?

News

The commitment to responsible investing has significantly grown over the last 12 months as the landscape changes, politically, environmentally and of course due to the global pandemic.

Individuals and businesses have a better understanding of, and greater commitment to, consciously behave in ways that have a positive effect on the communities from which they operate and live.

Environmental, Social and Governance (ESG) principles have become increasingly familiar in the business world and frequently appear as agenda items at company board meetings, not least because focusing solely on profit is no longer considered acceptable or without reputational damage. However, ESG is about more than just mitigating the threat of reputational damage. Company boards are motivated by more than just profit and loss. Conversations are broader and shareholders and company directors expect their management teams to respond to, what can be uncomfortable, questions around the impact their companies have on the environment, their local communities and society more widely.

Making the right choice

Not only can individuals and companies have an impact in terms of the way business is conducted and in their everyday lives, but also when making investment decisions. Fund managers consistently research the changing and growing needs of their investors and so will seek ways to incorporate new ideas into their investment approach. This is good for investors because it adds diversification, by spreading their investments across a range of funds that complement each other and meet their principles.

Getting the terminology right

As ESG principles are more commonly used the terminology has elasticised in such a way that what one person identifies as ‘sustainable’ may not meet another’s criteria. Finding a fund or strategy that matches your own specific ethics and morals can become a greater challenge as a result.

In response to the move towards broader and broader language the Financial Conduct Authority has reacted to confusing jargon by devising a common set of terms for advisors to use, know and understand. This should result in more advisers having a deeper understanding of the strategies they are recommending to investors, which should in turn lead to investors trusting that the recommendations meet their own requirements and that investments accurately reflect their wishes.

Meaningful commitment

It is encouraging that both individuals and businesses are seeking to ensure that their investments are environmentally, and socially responsible. However, a potential problem in this area is termed ‘greenwashing’ whereby a company provides the impression it is being more socially or environmentally responsible than it actually is, which makes it more difficult for fund managers to determine whether it warrants inclusion in a fund. This means that the research and analysis involved is much deeper, as managers not only need to ensure that a company has the potential to provide growth, but they also need to know that the companies making up their funds reflect how it has been designed and described to investors and their advisers.

With a more structured approach to terminology and focused research, investment companies are able to continue developing their existing strategies and introduce new ones to meet the changing needs of investors. (This should make it easier for business and individual investors and their advisers going forward to choose strategies that align with both their financial and ESG ambitions.

Whether an investor has no ESG preference or a set of specific requirements, the main role of the investment manager is to provide a return consistent with the agreed level of risk being taken. Ultimately, the returns provided by investment managers must warrant their charges and the evidence so far shows that when implementing some form of ESG strategy within a proposition, returns remain consistent with risk.

For further information on ESG investing, or other independent financial advice, please contact Girlings’ independent financial planner, Tracy Furminger.

Before relying on this commentary please read the Reliance on information posted section in our Terms of Website Use in our Legal section. Please note that specialist advice should be taken in relation to any specific queries and the information above is provided for general information purposes only.

Tracy Furminger

Chartered Financial Planner

Independent Financial Planning

Tracy is a Chartered Financial Planner and has been providing independent pensions and investment advice to clients for nearly 20 years, with an emphasis on meeting clients’ long term objectives.