Opting for ESG investing means directing your funds towards companies committed to improving the world. This ethical investment approach allows individuals to harmonise their financial decisions with their moral compass.
We are all becoming increasingly aware of effects of climate change, and its impact on the planet and society. 2023 was the warmest year since global records began in 1850, a trend continuing into this year with March confirmed as the warmest in modern times, the tenth monthly record in a row. Sea surface temperatures are hotter than ever, and Antarctic sea ice is at extreme lows. While all this is exacerbated by the El Niño weather event, the main factor is human-caused climate change.
We face choices every day – how much plastic we waste, watching electricity usage, whether to shop locally, reducing our carbon footprint etc. Small steps here and there to try and do our part for the environment and society. And we can make choices when investing too, by opting for companies which don’t contribute to problems like climate change, inequality etc and have strategies to control the risk – responsible investing. And it’s not just about the environment, but also social impact.
If you are starting to look into this, it can be confusing, not least because of the different terminology used to describe such investment approaches, often used interchangeably. There’s ‘ESG investment’ which stands for environmental, social and governance issues, ‘responsible investing’, ‘sustainable investment’ and now also ‘impact investing’. Don’t let this put you off, they all share a common philosophy – to help make the world a better place – and if you use an adviser, they will guide you through it.
ESG definitions
This type of responsible investing prioritises financial returns alongside a company’s impact on the environment, its stakeholders and society. Here are some simple definitions:
- Environmental – The impact of a company’s activities on the environment: carbon footprint, greenhouse gas emissions, renewable energy usage, using a sustainable supply chain etc. Positive outcomes include managing resources and executing environmental reporting/disclosure or avoiding/minimising environmental liabilities such as climate impact or pollution.
- Social – A company’s impact on its employees, customers, consumers, suppliers and the local community: how employees are treated, racial diversity among staff and executives, LGBTQ+ equality, inclusion programmes etc. Positive outcomes include increasing health, productivity and morale, or reducing negative outcomes such as high turnover and absenteeism.
- Governance – The way companies are run: how does the management drive positive change? What are its business ethics? Positive outcomes include aligning interests of shareowners and management, improving diversity and accountability, and avoiding unpleasant financial surprises, such as excessive executive remuneration.
In summary, ESG investing considers how a company serves its staff, communities, customers, stakeholders and the environment.
Increasing popularity of ESG investing
Interest in responsible investment is growing noticeably. Investors are placing greater emphasis on the environmental and social impact of their investments, wanting to make sure the firms benefiting from their capital are well governed, socially conscious and not unduly harming the environment.
They are increasingly seeking to manage exposure to ESG factors, while generating sustainable long-term returns – responsible investing and performance can be complementary.
Survey findings published by Morgan Stanley in January 2024 found that “more than half of individual investors say they plan to increase their allocations to sustainable investments in the next year, while more than 70% believe strong ESG practices can lead to higher returns”.
Conducted by Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Wealth Management, their “Sustainable Signals” report revealed that 77% of individual investors globally are interested in companies and funds which evaluate their economic and social impact at the same time as aiming for market-rate financial returns. Key reasons for this growing interest are concerns about climate change and the financial performance of sustainable investments.
Performance vs impact
Investing responsibly doesn’t mean that you have to sacrifice returns.
You can take a more philanthropic approach if you wish, by investing in companies that prioritise their social impact over profitability – but this is just one end of the spectrum. At the other end are investments which put profit first over impact, with ESG strategies focusing on how an organisation manages risks and opportunities around sustainability issues.
In the middle we have ‘profit with purpose’, where you invest with the intention of generating positive, measurable social and environmental impact alongside a financial return – often called ‘impact investing’. This investment approach has seen exponential growth, breaching the $1 trillion benchmark in 2022, according to the Global Impact Investing Network.
With more large investment managers entering this market, it is becoming easier to trade in this sector. And as more investors seek tangible outcomes, impacting investing is emerging as a resilient and future-proof choice.
Investment planning
What does all this mean for you as a private investor? It can get confusing, but you do not need to spend hours researching a company’s ESG track record, or comparing its share price with other companies, to try and work out which ones to invest in. As with other capital investments, you can buy funds which invest in highly rated companies. This also reduces risk as it provides much more diversification.
At the end of the day, it is important to apply the same investment principles with ESG investing as with all other capital investments:
- Establish your objectives and time horizon.
- Obtain an objective analysis of your appetite for risk.
- Have a mix of assets and sectors in your portfolio to reduce the risk of one area performing badly.
- When considering a new investment, analyse how it fits in with the rest of your portfolio and impacts its risk weighting.
- Conduct regular reviews around once a year.
You can choose to use a financial advisory company that incorporates responsible investing within its advisory services. Indeed, nowadays a responsible adviser would look at your ESG preferences alongside traditional assessments when evaluating suitability of investments for clients.
Responsible investing does not have to involve more work on your part, and you can invest as you normally would, without compromising returns or your risk weightings – but with the difference being which companies benefit from your investment capital. You don’t need to focus all your portfolio on ESG funds, but it is one step you can take to help protect our environment and society.
We are committed to ESG investing
At Blevins Franks, we’re committed to offering sustainable and responsible investing options. We offer a range of investment solutions that take a more active approach to investing via companies and initiatives that have particular environmental and sustainable goals at their core.
We can offer specialist managers dedicated to solely providing sustainable/responsible investments, as well as other managers whose investment proposition is evolving to incorporate more of these elements—something all investment managers will need to do from a regulatory perspective.
Contact Blevins Franks to find out more about our approach to responsible investing
All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised investment advice. The value of investments can fall as well as rise, as can the income arising from them. Past performance should not be seen as an indication of future performance.
