In this latest blog, we take a look at a type of investment that could help you do just that.
ESG funds are growing in both popularity and choice all the time, as people get increasingly excited about the opportunities they offer to help themselves and the planet we inhabit.
The Cambridge Dictionary describes ESG as ‘a way of judging a company by things other than its financial performance, for example its policies relating to the environment and how happy its employees are’.
It stands for environmental, social and governance and is used to describe so-called sustainable investment in companies that operate in a more ethical manner – from how they treat their employees to their impact on the environment and how they produce their goods. Increasingly, acting ethically is not just viewed as a nice thing to do, but an important marker for a company’s future performance and staying power. Whereas, in the past, opting for ethical investments might have been considered niche, and associated only with trendsetters in areas like environmental innovation, for example, it’s now all the rage and there has been a corresponding explosion in the amount of options available, when it comes to ESG funds, and their potential to deliver positive growth.
In fact, global consultancy PwC, in its Global Economy Watch for 2021 – From the Great Lockdown to the Great Rebound report, highlights growth in ESG investing as one of the key trends for this year. It predicts that: “Green bonds, which are used to directly finance environmental projects, currently make up less than five per cent of the global fixed income market. In 2021, total green bond issuance will increase by over 40 per cent to top half-a-trillion US dollars for the first time. In addition, investor appetite for environmental, social and governance (ESG) funds will continue to increase and could account for up to 57 per cent of total European mutual funds by 2025.” In fact, according to financial news and data company Morningstar, 505 new ESG funds were launched in Europe during 2020.
What does investing ethically mean?
The COVID-19 pandemic has shaken us all up a bit, and highlighted the importance of looking after one another and the environment around us, to protect us against the uncertain. It has accelerated a shift that was already taking place in public sentiment, towards supporting companies that do the right thing and are financially and ethically sound, and therefore sustainable for the long term.
But how do you decide whether a company or a fund qualifies as a good example of ESG?
“You can judge companies on a range of things,” explained our director, Wayne. “Some of it comes down to how a company chooses to operate – for example, where does it invest, does it operate a risky approach to doing business, is it producing things which are damaging to people or the world we live in, or is the way that it manufactures or provides its services up to scratch? Increasingly, the view is that – contrary to historic perceptions of this being a minority area for staunch do-gooders – companies that choose to do things right ultimately have better long-term prospects as well.”
He added: “We’ve all seen how information about how companies operate has really shifted public sentiment in recent years – with high-profile news stories about foreign chains choosing to avoid paying UK business taxes and the obscene executive bonuses that were one of the contributing factors in the last financial crisis. These things matter more and more to potential employees, investors, suppliers and corporate partners, who will choose to either work with a company or not, according to its track record.
“When it comes to choosing an investment portfolio, there are all sorts of options to consider. Companies can be screened according to how well they look after the environment, how they treat their employees and suppliers, the working environment they provide, their diversity policies, the role they play in their communities, executive remuneration, their attitude to complying with regulations like health and safety, and even how reliable they are at paying their dues.
The European Federation of Financial Analysts Societies (EFFAS) lists the corporate performance areas businesses are ranked on for ESG purposes, as: energy efficiency, greenhouse gas emissions, staff turnover, training and qualification, workforce maturity, litigation risks, corruption, new product revenue and rates of sickness absence.
This can be everything from how companies mitigate their impact on the world in terms of pollution and energy use – through to how they use the efficiencies gained, for example by installing low-energy LED lighting, to save cost and boost their overall financial strength as well as helping the environment.
In terms of society, it comes down to measures such as the quality and integrity of the products and services a company offers, the working conditions in its offices and factories, and how well it protects human rights. Companies with better morale and a reputation for quality will have better customer appeal and brand loyalty – particularly among today’s ‘Millennial’ generation, who are increasingly choosy about the credentials of the businesses they buy from. And, if firms have the right core values, they are increasingly seen as having better foundations when it comes to investment decisions.
A serious business
In fact, ESG credentials are now seen as such an important marker of business quality, they are monitored by a number of leading global organisations including the United Nations, with its Principles for Responsible Investment (UNPRI), launched in 2006, and financial news service Bloomberg. More than just a beacon for companies doing good, ESG is increasingly seen as an early warning system for those engaging in practices that could ultimately call their long-term viability into question.
“I always think you could almost liken the process of choosing the right investments, to the way you choose your friends,” added Wayne. “Would you rather align yourself with someone flighty and fickle, who does things you don’t personally approve of, or someone solid and steady who you know has your interests at heart and will be there for you in the long-term, and support you when you need them?”
The next wave
Of course, ESG portfolios are also a way of investing in some of the most innovative and exciting developments coming over the horizon, such as companies developing new technologies for things like energy production or waste management.
This is where it can get really exciting, because you can actively target your money at things that will directly change the world we live in for the better, with the potential to achieve impressive growth as new developments take hold.
In fact, according to recent research from the OECD (Organisation for Economic Co-operation and Development), $6.9trillion needs to be invested, every year, to meet world net-zero climate goals by 2050 (that’s almost three times as much as the UK Gross Domestic Product (GDP) of $2.8trillion). Or, according to the United Nations Emissions Gap Report, the world will have warmed up by three degrees by that point, displacing 275 million people from flooding and killing off a plethora of different species. Energy and power generation make up 44 per cent of global emissions and tackling this, alone, will mean investing significantly more in developing new green alternatives.
And it’s estimated that governments can only meet about 20 per cent of what is needed. This means the rest must come from companies, financial institutions and individuals, which is why we have a unique opportunity to make a tangible difference to the planet we are part of, through our investment choices as well as our lifestyle ones.
“In fact, finance is increasingly being viewed as one of the most powerful ways of positively impacting our planet’s future fate,” continued Wayne, “because, with it, we can directly affect the activities of the companies that make our world – and our individual lives – what they are.
“And because this segment of the market is becoming less of an outlier, you’re not talking about only investing in small startup enterprises, either. Indeed, because many of the blue chips are recognising the need to get onboard with the green agenda, and in some cases change their business models and how they do things, you can invest in portfolios featuring some of the biggest and most successful companies in the world, and still enjoy that feel-good factor.”
Choosing where to put your money
We’ve researched this area of investing, in response to increasing customer demand, and identified a number of portfolios that we believe offer the right mix of ethical factors and potential for positive returns.
Wayne said: “We see this as a real and growing opportunity because the urgency around protecting the planet, and increasing public expectations of the behaviour of firms they deal with, mean the ESG agenda is only going to get bigger. We’ve already seen a dramatic increase in the number of investment options available, whereas choice in this area tended to be somewhat limited in the past.
“So, not only has the market broadened, but within it there are lots of well-performing investments, at reasonable cost, which make it all the more worthwhile investing in that way
“We’re getting an increasing number of enquiries from customers who want the reassurance of knowing that the companies they’re supporting are doing the right things.
“In fact, we see this as one of the most exciting areas of finance at the moment – it’s placing a lot of power in the hands of ordinary individuals to, literally, change the world for the better.”
“So much so that, in the future, I think ESG will be mainstream and expected, rather than an alternative to ‘normal’ investment choices. It will come to represent the way companies are expected to operate.”
Greenwashing won’t wash
Like all types of investment, though, it’s important to do your homework, and understand what’s out there and your own particular requirements within that.
“There are all kinds of nuances within ESG investing,” explained Wayne. “For example, you might want to choose a portfolio featuring cutting-edge companies that are actively working on new environmental approaches and, literally, changing the world.
“Or it might be that you want to eliminate companies from your portfolios that produce tobacco or conduct certain types of mining, or fossil fuel production.
“At the same time, it could be enough for you to know that a blue chip company in sectors like chemical or petroleum production, and energy supply, is innovating towards new solutions that will eventually supersede their traditional activities, or are offsetting their environmental impacts by planting trees.”
Deciding what suits you
Number 1
There are lots of options, and it’s important to decide which one suits you. For example, some portfolios do so-called negative screening, checking for activities that might be considered bad, such as using cheap foreign labour to manufacture clothes, conducting animal testing or relying on fossil fuels. Others screen positively, to identify companies that actively try to make a difference, such as solar or other green energy innovations. Or, these might also include businesses that engage in more traditional activities that perhaps have had negative impacts in the past, but aim to make up for this, for example producing oil but planting so many trees for every barrel they sell, or manufacturing goods abroad but paying their workers a fair local wage and ensuring they are operating in proper working conditions.
“There are absolutely loads of different ways of looking at this area, and lots of different decisions each individual can make on which way they want to go with it,” explained Wayne. “That’s why we go out of our way to research what’s out there, so that we can explain the options in detail to our clients, and help them make the choice that’s right for them.”
Number 2
Set your sense of doing the right thing against a clear idea of what you want to achieve financially. Gone are the days when investing for good was the less lucrative option and the global green agenda, in particular, means that many of the companies responsible for making the most positive changes, are also among those with the greatest potential, and so offer the potential for impressive returns.
We can help you understand where such options might fit within your overall investment portfolio, and ensure you choose the right mix of company characteristics and performance to help you achieve your goals, as part of an overall balanced portfolio. It’s important to remember that – as with anything – you are investing for the long term, and you need to consider what the prospects and sustainability of the companies you’re investing in are, over the timescale you want. Then, the impact your choices could make on the world during that same period can prove really quite exciting!
Wayne concluded: “At the end of the day, ESG is another example of a complicated financial instrument which is available to invest in. The market has broadened massively in the last five years and continues to do so, creating more and more choice.
“Within that space, it’s down to each individual to decide how much risk they are prepared to take, and what ESG means to you.
“You need to ask questions like ‘does this portfolio match my personal vision and values?’, ‘is the portfolio diverse enough?’, ‘is the cost right and am I comfortable with the charges involved?’. Here at Lairgate Financial, we do the research so that, once you’re clear what you want to achieve, we can point you to the right portfolios to suit you, which will ensure the right balance between getting a good return at reasonable cost, and having your desired level of positive impact on the world.”
If you would like to arrange a free, no-obligation initial appointment to take a fresh look at your financial health in general, as well as your options for placing some of your pension or other investments into ESG funds, email us or call (01482) 860700.
This blog is intended to provide readers with viewpoints, opinions and inspiration regarding options they might want to consider. It is not intended to be taken as advice and we strongly recommend seeking professional financial advice before taking any action.