Environmental, Social and Governance (ESG) investing

Over recent years more individuals have altered their perception of Environmental, Social and Governance (ESG) Funds. What may have been viewed as a ‘niche’ market, is now considered a widely successful and serious investment strategy. Volatility in the stock market this year has reinforced this change of attitude as Sustainable Funds have performed well against ‘conventional’ funds.  

According to research earlier this year by Trustnet, a UK provider of online investment data, funds investing using ESG principles outperformed their conventional rivals over the opening eight months of the year. It is easy to see why the popularity of sustainable investing continues to soar.

I highlighted some of the key themes shaping ESG investment attitudes in my ‘the rise of ethical investing’ blog in April earlier this year. Many investors believe that ESG investing will evolve from a ‘trend’ to ‘the new normal’ as cultural views change and more pressure is applied on governments and corporations to act according to the impact on society and the environment.  

The ramifications of COVID-19 have also accelerated the transition towards an ESG focus in many ways, particularly by highlighting social issues and driving reform.

Although there has been a surge of interest in ESG funds, with more and more funds being classified as ESG friendly, there remains much debate and a lack of clarity regarding what constitutes an ESG fund. At first thought, an investor may expect to invest into a small, innovative company looking to revolutionise renewable energy. However, ESG classifications don’t necessarily conform to this type of expectation which is why there remains an ongoing debate about how sustainable some funds are.

It is not uncommon to see many ESG funds with significant holdings in the likes of Apple, Amazon or Microsoft. One viewpoint may be that technology stocks contribute less damage to the climate than an oil supplier does. However, being ESG friendly does not focus simply on one aspect such as climate change. 

For example, social media platforms have fallen into focus over recent years concerning data privacy and immoral use of information. The Facebook/Cambridge Analytica scandal provides a stark reminder of this.

It can be difficult to understand the ways in which a company addresses ESG considerations. Certain aspects of ESG can appear contradictory when looked at in isolation. 

An environmentally conscious investor would likely see the aforementioned oil company as an immediate stock to avoid. However, the business may demonstrate an exceptional record of introducing positive social policies and providing strong governance. Both of which could score highly when assessing them for an ESG rating.

It is important to understand that an ESG rating may derive from different metrics. For example, factors to be considered may include anything from the health and safety of a company’s employees to reducing the company’s carbon footprint. As there are a myriad of different measures when it comes to ESG, one person’s definition of this investment strategy may differ largely from another’s.

Each person will have a different set of beliefs and values so when it comes to ESG investing it may never be a straight line. However, understanding what your values are and selecting an investment approach to address these is a good start.

At Birkett Long IFA LLP, our Investment Committee have built our own in-house Model ESG Investment Portfolio to support clients that wish to integrate an ESG focus into their investment strategy.

Please do not hesitate to contact me should you wish to discuss ESG investing or your investment arrangements in general. 

I can be contacted on 01206 217329 or trey.vella@birkettlong.co.uk.