In April 2019, David Attenborough released his “Climate Change – The Facts” documentary which launched issues of environmentalism deeper into mainstream British consciousness.
At a similar time, we have had Greta Thunberg (the 13-year-old Swedish climate change speaker) chastise the UK parliament for “not acting in time” to address global pollution. London also simultaneously experienced Extinction Rebellion, where tens of thousands of protestors (including Dame Emma Thompson) spread across the city to demonstrate on the issue.
Clearly, concerns around the environment are becoming more centre-stage in the minds of many British people, who want to know what can be done to look after the planet and its precious ecosystem. That involves taking a hard look at our lifestyles such as the way we travel, consume energy and our eating habits. It also means taking a hard look at our money.
Investing and climate change are not necessarily two concepts which you might intuitively put together in your mind, but they are related in important ways. The companies, causes and activities we invest in, after all, often have a big impact on CO2 emissions, plastic pollution in different parts of the world as well as fragile ecosystems.
This touches on the subject of “sustainable investing” – an area of growing interest to our clients here at WMM, and for many investors across the country. Sometimes also referred to as ESG (Environmental, Social & Governance), sustainable investing offers a powerful approach to investing which balances investors’ desires to make a strong investment return, whilst also contributing to the good of the planet.
In this short guide, we’ll be sharing an overview of what ESG is, how it works and how you can start to adopt this approach more into your portfolio. We hope you find it helpful and interesting. Please note that this content is for information purposes only, and should not be taken as financial advice. To attain personalised, regulated financial advice into your own situation, please speak to us.
What is ESG?
When you invest in a company it will have its own track record with the physical environment (e.g. CO2 emissions), to society (e.g. employees’ working conditions) and towards governance (e.g. how it handles transparency and conflicts of interest). ESG is an approach to investing which focuses on committing investors’ money towards firms with a strong track record on these three fronts, whilst also maintaining a healthy return.
To reiterate, this approach isn’t about prioritising ESG over investment returns (which can perhaps be described as a more “philanthropic” or “charitable” approach). Rather, it’s more to do with balancing these interests, as they do not have to be mutually exclusive. Evidence suggests that you can combine the two elements and hold a portfolio that will make you feel better, whilst still delivering near market returns.
How popular is ESG as an approach?
Within the past decade, ESG has moved from a niche area of investing and more into the mainstream. The first “ethical fund” was launched in the UK in 1984 under the name of the F&C Stewardship Growth Fund.
Today, however, there are now many asset management firms in the UK which offer a selected set of investments to their clients within a particular field of ESG (e.g. gender workforce balance), and some even integrate an ESG approach into all of their funds and investments.
It is still fair to say that ESG is still not the “normal” approach when it comes to investing within the UK financial sector. Gradually, however, ESG is climbing up the agenda with the likes of Mark Carney (Governor of the Bank of England) stressing the importance of the environment along with regulators such as the Prudential Regulatory Authority, the Pensions Regulator and the Financial Reporting Council.
Questions to ask yourself about ESG
At this point, you might be highly interested in ESG as an approach to your own investments. Or perhaps you are concerned about how your money is affecting the environment but would prefer to gradually incorporate ESG as an element within your wider investment strategy.
Regardless, we recommend that you pose some important questions to yourself which you can then discuss in greater detail with your financial adviser. These include:
- Do you have a particular set of causes or concerns, which you care deeply about? For instance, perhaps you are deeply worried about the impact of certain companies’ effects on plastic pollution in the ocean. Or perhaps you are most troubled by the pace of deforestation in particular global regions. There might be funds which you can invest in, which help you steer away from these sorts of practices.
- Do you want to incorporate a philanthropic element to your portfolio? In other words, is there are a portion of your investment money which you are happy to see go towards a good cause, with the absolute return from it being less important?
- How does ESG fit into your financial plan when you are building a portfolio (the accumulation phase), compared to when you are drawing an income (the decumulation phase)? The stage of life you are in will have a big impact on the type of ESG investments which might be most suitable to your needs. For instance, you may not want to expose yourself to unnecessarily risking narrow ESG investments when your priority is to preserve your wealth in retirement, as you draw a regular income.
- Are you comfortable in perhaps accepting an absolute performance return through ESG? Some fund managers will argue that a very strict set of ESG investments will likely lead to lower returns, compared to if you took a more lax or balanced approach. You should ask yourself how “strict” you want to be with your ESG investments; and how this might affect your likely investment returns.
- Talk to your adviser about how investing ‘sustainably’ might affect you. Many people are finding that they can support the Planet whilst also supporting themselves, and that has to be a good thing for everyone.
