Businesses and individuals all across the country are taking steps to make more sustainable and environmentally friendly choices. Choosing where to invest is no exception. This is where ESG investing comes into play, which relies on independent ratings to assess a company’s policies and behaviour in relation to environmental performance, social impact, and governance issues. In this guide, we will be looking at how ESG investing works and how you can incorporate ESG into your wealth management strategy.
- What is ESG?
- What is ESG investing?
- Why has ESG become more important?
- What are some ESG considerations?
- How to incorporate ESG into your investment strategy?
- How can Alan Boswell Group incorporate ESG into your investment strategy?
The avoidance of so called ‘sin stocks’ (tobacco, gambling, adult entertainment and weapons) has long been a strategy for investment managers, but companies are now looking to go one step further to ensure that their investments are sustainable and ethically sound. ESG stands for Environmental, Social and Governance. Each individual element can be broken down to mean:
- Environmental: This part of ESG refers to the energy a company takes in and the waste it puts out into the world. It looks at the resources a business uses and the consequences these have on the planet.
- Social: The social aspect of ESG considers the relationships that an organisation keeps and the kind of reputation it has among the community. This includes diversity and inclusion, as well as employee relations.
- Governance: Every company should have an internal system of procedures, practices and controls in order to govern itself. This covers how it makes decisions, meets the needs of stakeholders and complies with the law.
ESG investing is sometimes referred to as ‘socially responsible investing’ or ‘sustainable investing’. It is when you make investment decisions which prioritise optimal ESG factors. This is generally seen as a way of making investments with human wellbeing, the economy and the environment all in mind.
ESG issues have been part of investment decisions for many years, but recently ESG stocks have been receiving a lot more attention. This has further validated the premise behind ESG investing and emphasised the link between corporate behaviour and business results.
More and more investors are choosing to fund projects and companies which support sustainability and meet emerging regulations. As the climate crisis has become a more pressing subject in recent years, generations have begun to turn to more sustainable ways of living. Therefore, it has also become more important for investments to be channelled into companies that support these ways of thinking and living. For example, if you are a vegan, then you may not want to invest in a company that sells leather goods as this doesn’t support your views. Investments have evolved in recent years to enable people to still be able to get a return, but at the same time make informed choices on who they want to invest in, often based on their own views and lifestyle choices.
If you want to go down the route of ESG investing, then you will need to look at the Environmental, Social and Governance criteria of any assets you are considering. This means looking into environmental factors such as Greenhouse Gas (GHG) emissions, climate change policies, energy consumption and waste production. Social factors which should be considered include human rights protection, employee relations, diversity and health and safety. And finally, you need to take into account governance issues including management quality, board diversity, political lobbying and tax strategies.
Incorporating ESG best practices into your investment strategy requires taking a different approach to choosing your investments. Any company which is committed to ESG initiatives should publish their goals and the progress they are making towards these. It is also a good idea to spend some time researching the brand’s reputation online, their reputation among customers and what their employees think of the company.
Just like with any investment, you need to consider financial performance.
If ESG is something that is important to you, we can make sure we factor this is into your investment recommendations. We will take the time to understand your preferences when it comes to ESG issues, and assess these alongside your risk appetite, how much and the length of time you’re looking to invest and what your goals are. These would also be different depending on whether you’re investing personally, or on behalf of a business, trust or charity.
For instance, if you particularly want to focus on environmental issues, then the investment managers we recommend may look for companies that have robust policies on waste management and clean energy, for example. Focusing on social issues would include looking at a strategy that considers working conditions and human rights, whereas for governance the investment managers might look at the standards that companies have to run their business.
Further, we can look for investment managers that use their position to encourage companies to consider ESG practises, or you may want to exclude certain investments from your portfolio altogether. Once we have a solid understanding of your views on these important subjects, we will incorporate them into your investment strategy.
If you’d like to discuss an ESG investment strategy, contact our financial planners on 01603 967967.
The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.