In previous posts here at WMM, we have discussed (in broad terms) what environmental investing is, how it has developed in recent years and how people can get started with social impact investing or “ESG investing” (Environment, Society & Governance).
As clients and readers of our blog have expressed more interest in this subject, we thought it would be helpful to go into a bit more detail. Here, we’ll be sharing five broad strategies when it comes to ESG investing, which you may want to consider with your financial adviser.
Please note that this content is for information and inspiration purposes only. It should not be taken as financial advice or investment advice. To receive such advice, please consult an independent financial planner here at WMM (in Oxford) or closer to your location.
Five ESG Investment Strategies
#1 Non-ESG Exclusion
This approach can probably be described as the “purist” approach to ethical and environmental investing. Under this strategy, you work with your investment manager to “rule out” specific industries or sectors (e.g. oil extraction), countries or businesses (e.g. those producing high levels of CO2 emissions) from your investment portfolio, using ESG principles are your guide.
The advantage of this approach is that it allows many investors to align their ESG values firmly with their investment strategy. The potential drawback, however, is that this approach can limit your options when it comes to building a balanced portfolio which not only appropriately diversifies (in order to mitigate risk) but also holds the potential for strong returns.
#2 Leader Screening
Some investors might be comfortable committing their money towards companies in industries which the former strategy would exclude, on the basis that these businesses are showing a high ESG performance in relation to others in their sector. For instance, under this approach, an investor might be happy to invest in car manufacturers which are leading the marketing in electric car manufacturing, relative to others in the automobile industry.
The advantage of this strategy is that is can help incentivise companies in a wider range of industries to pursue ESG principles. The drawback, however, is that this approach might not fit as neatly with an investor’s ESG values compared to the first approach.
#3 Integration
Under this strategy, ESG investments are gradually incorporated into an investor’s portfolio alongside more traditional, non-ESG investments. The exact balance between the two types of investment might vary from person to person, depending on their distinct investment goals and their personal tolerance to investment risk.
This approach can be attractive to investors who wish to start exploring the world of ESG investing, without necessarily going “all in” (which might feel too risky or uncomfortable). It also gives the opportunity to learn more about ESG investing via direct experience, in an investor’ portfolio. On the other hand, this approach to ESG can feel too “watered down” to some people.
#4 Impact Investing
There are certain companies in the world which exist specifically to address certain issues pertaining to the environment or society. Examples include firms which offer storage for renewable energy sources, such as wind or solar power. Through an impact investing approach, an investor can focus their money on these types of companies to generate a positive return, whilst making a positive difference.
The attraction of this approach to ESG investing is that it is not simply about “damage limitation” regarding the environment. Rather than just investing in companies which are trying to reduce their carbon footprint, this strategy involves focusing investments on businesses which are actively trying to reverse the problem. This can feel tremendously exciting.
However, this type of investing needs to be navigated carefully with your investment adviser or financial adviser. This is particularly because many companies which qualify as impact investments are also innovative startups, which tends to carry higher investment risk.
#5 Ownership / Direct Engagement
Another way to influence different companies towards adopting an ESG approach is to directly engage with them. This doesn’t necessarily mean standing outside of their offices with a placard, by the way! Rather, it involves using tools such as shareholder power to bring ESG principles more onto the board’s agenda, and influence positive change.
If you are a company shareholder yourself, then you might consider doing this in consultation with a professional adviser. On a wider scale, however, you could adopt this approach by investing in funds and financial products which apply this influence to companies, on your behalf, at the executive and board levels. This approach can be attractive to many investors. Its drawbacks include limits to the range of products and funds which currently do this, although it would be fair to say that the direction of travel is towards growth in these opportunities.
Final Thoughts
As you can see, there is a range of approaches to ESG investing. Each strategy holds out its own respective pros and cons, and will likely vary in appeal depending on each investor’s distinct goals, circumstances, values and attitude to risk.
Many people might be interested to have learned the difference between “ESG investing” and “social impact investing”, after reading the above. The former can be described as an “umbrella” term, which refers to investment approaches which factor ESG principles into their portfolio to varying degrees. The latter goes further than this by actively investing in companies which seek to not only reduce their own negative impact on society and the environment but also make a positive difference via their products, services or solutions.
If you are interested in learning more about how you could integrate an ESG approach into your own investment portfolio, then we’d be delighted to hear from you. Get in touch today to arrange a free, no-commitment financial consultation with a member of our team:
01869 331469
Castle Farm
The Stableblock,
Clifton Road, Deddington
OX15 0TP
