If I try to invest my money ethically and responsibly, will I lose money? This is a question our financial advisers often hear in and around Oxford, and we’d like to address it here.
In our previous article: “What is sustainable investing? A short guide”, we talked in more detail about what ESG investing is, how it works and how investors can start implementing this approach more into their portfolios.
In this article, we’ll be looking more specifically at the personal, financial pros and cons of an ESG approach to investing. To quickly recap before we dive into this subject:
- ESG stands for “environment, society and governance”, and refers to a style of investing which seeks to create a positive impact on these aspects of our world.
- An example would be investing in a company which seeks to minimise its carbon footprint or address resource scarcity (E); mitigate labour/employment issues such as health and safety standards (S); and/or one which promotes transparency or gender diversity within corporate boards (G).
So, does ESG actually work from an individual investor’s point of view? Let’s look at that below. Please note that this content is for information purposes only, and does not constitute financial advice. Consult with an independent financial adviser prior to making any big investment decisions, such as those concerning ESG.
Does ESG work?
There is still a prevailing view within much of the financial services industry which goes something like this: “The top priority for an investor is shareholder value; investing for any other reason is simply going to lead to a terrible return.”
In other words, the argument goes that if you prioritise ESG issues when choosing your investments, you are essentially going to lose money. But is that actually true?
The answer is not a clear “yes” or “no”, but rather “it depends”. Certainly, there are cases where investing in a certain ESG fund or company would lead to a poor return for you, perhaps because their fundamentals are poorly set-up.
However, we would argue that in many cases it is possible to incorporate ESG into an investment portfolio with only a tiny reduction in performance. Sometimes, it can even be done with no sacrifice to your investment returns at all.
Remember, ESG is not a one-size-fits-all approach to investing, and you can implement it to a greater or lesser degree into your portfolio. It’s not necessarily an all-or-nothing choice, potentially involving a huge sacrifice in your investment returns. Speaking with a qualified financial planner will enable you to identify the degree to which you can safely transition to a more ESG investing approach, and ascertain the timescales and manner in which to do this.
Pros of ESG
There are many positive reasons to consider adopting more ESG investments into your portfolio. One important one is satisfying your own desire to feel good about your decisions. Simply put, it can feel immensely personally rewarding to know that your money is not only working towards your own future, but is also contributing to a better world.
Another important thing to consider is the long-term future of ESG itself. Whilst some have expressed the idea that ESG is a passing fashion (like green juice), the weight and scale of the worldwide movement towards ESG strongly suggests that it is here to stay.
The 2008 financial crisis provided a big wake-up call in the Western world for more systematic, good governance. Climate change is also not going away anytime soon, and ESG-conscious demographics such as Generation X and millennials are increasingly driving calls for solutions to these kinds of global challenges across the board – including in the world of investing and financial services.
Moreover, there is some evidence to suggest that there is a correlation between companies which “do well” financially (therefore, also for shareholders) and which “do good” in the way they conduct themselves and operate. This isn’t to say that all ESG investments are destined to success and provide a return – this is not guaranteed. All companies have the capacity to fail. However, there is something to be said for the argument that businesses which treat their staff, consumers, resources and environment with respect can result in strong fundamentals which often give them a strong foundation for long-term success.
ESG Cons
Whilst we are generally very positive about ESG investing here at WMM, it’s important that we try to be balanced and highlight some important aspects of this approach which can be disadvantageous to the individual investor.
Perhaps the primary danger of ESG investing is that you start to focus more on changing the world in your investment decisions, rather than on your personal financial goals. Whilst it is a noble thing at times to be self-sacrificial for the greater good, it does no one any favours to scupper your pension income, for instance, by neglecting your investment performance.
Proper ESG investing, of course, involves balancing these two important goals at the same time: achieving personal investment goals whilst making a positive ESG impact. Here, this is where working with a financial planner can offer you a lot of value. They can help you keep an eye on the companies and fund you are invested in, monitoring not just performance but also whether they are staying true to their professed ESG values.
Of course, it is also possible that by focusing solely on ESG investments, you miss out on a number of great investment opportunities elsewhere which hold out the potential for a better return. In these cases, perhaps you might want to discuss with your financial planner about how to balance your portfolio so that it includes some strong ESG elements whilst retaining some non-ESG components for specialist reasons or perhaps greater investment potential.
Or, perhaps you are willing and able to forsake an investment for the sake of the moral cause you believe in. Again, by consulting with a professional adviser you will be able to talk through these issues more carefully together, making an informed decision based on the best possible information available to you – rather than on emotion or gut feeling.
