Ethical investment, ‘green’ investment, or to give it its more modern name ESG (for environmental, social and governance) is growing in importance for both institutional and retail investors.
At Continuum, we can explain how it might be relevant to your own investment plans and how we can help you adopt it.
It used to be that ethical investing was a fringe activity. It began in the 1960s as socially responsible investing, with investors excluding entire industries such as tobacco production or those involved in the South African apartheid regime.
But times have changed. Concern about the environment and the impact of our investment decisions is no longer the preserve of idealists.
What exactly is ESG?
Today, ethical considerations have become mainstream, and ESG investment is a serious consideration for professional investors. The field is still growing and evolving, as many investors look to incorporate ESG factors into the investment process alongside traditional financial analysis.
ESG covers a number of investment strategies and a range of socially responsible and ecologically sound investments. Unlike Socially Responsible Investment which is based on ethical and moral criteria and screens out negatives such as “sin stocks”, alcohol, tobacco or firearms, ESG investing seeks ESG factors as positive.
Climate change may be one of the most important factors. The economic consequences of climate change are starting to be felt, and many investor initiatives are now supporting businesses that are attempting to reduce their carbon footprint.
ESG investing must be based on a range of environmental, social and governance issues, from a company’s track record on pollution to how socially responsible it is in the communities where it operates.
The key thought is that a business that scores high on ESG metrics may be better run, more in tune with current markets and sensibilities, and therefore provide better prospect for success in the modern world.
This requires research, and detailed analysis of the business practices and commitment of companies. As a result, most ethical investment is done through specialist mutual funds or unit trusts, where expert managers can thoroughly vet the ethical credentials of companies before investing.
A growing market
Institutional investors were initially reluctant to embrace the concept, arguing that their role was simply the maximisation of shareholder values. Environmental and social impacts, and broader governance issues such as corruption and the way suppliers are treated were regarded as irrelevant to investment decisions.
However, the tide of opinion has shifted, and evidence has grown that ESG issues have financial implications. In many important markets, including the U.S. and the EU, ESG integration has become seen as part of business management, and a positive for investment decisions.
This has meant that the importance of ESG considerations has snowballed. Many businesses now see meeting ESG obligations as crucial to attracting the level of investment they need.
But can it offer growing returns?
The idea that investors who focus on corporate environmental, social and governance factors can enjoy improved returns is now spreading across capital markets.
Many pension funds and insurers have started to award new business exclusively to asset managers with ESG capabilities.
What should you do?
The rise of ESG investing may demonstrate how markets and societies are changing. The big challenge for most corporations is adapting to a new environment that demands smarter, cleaner and healthier products and services. ESG investing can act as a measure of those values. Well managed companies, committed to strong sustainability and good governance, should be able to demonstrate superior long-term performance.
As a result, ethical investments are starting to take a bigger share of many portfolios. To discuss whether they might have a part to play in yours, you should seek expert advice.
Naturally, at Continuum we will be pleased to provide it the advice you need, and if you feel that ESG could be important to you, find the funds most closely aligned to your own stance.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.