New Year, New Approach? ESG and what you need to know

You can’t go far in our modern world without reading or hearing about the shift in attitudes towards “ESG” investing.  You might wonder, ‘what is ESG investing’ and why should I take notice?

Firstly, ESG stands for Environmental, Social, and Governance. Investopedia defines these as:

“Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights”.

ESG is often used interchangeably with SRI, which stands for Socially Responsible Investing.

Is ESG investing a fad?

Far from it.  Whilst ESG investing has for a long time been on the fringes of the investment mainstream, it’s steadily increased in popularity over recent years and is now an integral part of the investment landscape.  Evidence of this can be seen with the level of money flowing into ESG based investments.

More and more investors are making a permanent shift towards sustainability, positioning their investments to align with their values and wider views. Concern about the impact of daily decisions on the planet is spilling over into investment views via concepts such as “financial footprints”, which can lead to an ESG investment approach.  In turn, more and more investors are putting pressure on pension schemes and other collective funds to change the way they operate to benefit society.

The political rhetoric is also heavily aligned to an ethical investment approach.  With the US presidency now confirmed to be moving to the “other side of the house” from January, it’s looking increasingly likely that the US stance on climate change will strengthen.  Here in the UK, we’ve also seen a Labour amendment to the pension schemes bill which will require workplace pension plans to become carbon neutral by 2050 or sooner. This amendment will make it mandatory for company pensions to manage the effects of climate change as a financial risk and to report on how they are achieving that.

The Chancellor Rishi Sunak has also got in on the action with a recent announcement that climate disclosures should be obligatory across a large swathe of the economy, including large companies, banks, insurers, asset managers and pension funds. Meanwhile, next year should see the issue of Britain’s first green gilt to raise money for carbon-reduction projects.

Corporate attitudes to ESG are also changing.  In one announcement that may have made bigger headlines had it not been for the Covid-19 pandemic, Bernard Looney, the new chief executive of BP, announced in February that the oil giant was going to become net zero on carbon by 2050 or sooner. “It is clear to me, and to our stakeholders, that for BP to play our part and serve our purpose, we have to change,” he said. “We want to change; this is the right thing for the world and for BP”.  It would seem ESG is here to stay.

But won’t I potentially compromise on performance if I look to take an ESG investment approach?

It’s often been said that, socially responsible investments might be “riskier” than their more traditional investment counterparts. The theory being that by limiting the universe of companies that were eligible for investment, they were also limiting the investor’s potential returns.

However, recent performance data is reinforcing how sustainable investing has the potential to outperform traditional, non-sustainable strategies.  According to BlackRock, 94% of sustainable indices outperformed their parent benchmarks between January and March 2020.  The average returns of global socially responsible investing (SRI) funds have also outperformed their non-SRI counterparts and benchmark indices over 3- and 1-year timeframes ending April 20, 2020 [Charles Stanley].

It could also be argued that by investing in companies who use an ESG approach to governance, investors may be able to avoid companies whose practices could signal a risk factor.  This is something which we saw with BP’s 2010 oil spill and Volkswagen’s emissions scandal, both of which rocked the companies’ stock prices and resulted in billions of pounds in associated losses.

How can I access ESG based investments?

There’s been a relative explosion in ESG based funds and indexes over the past few years to meet the appetite of investors, so it’s easier than ever for investors to access these via their pensions and other investments, such as ISAs.

At Fiducia Wealth Management, we’ve constructed ESG based investment portfolios for clients who wish to take a more responsible approach to their investments.  These are aligned to a client’s risk appetite (from Prudent to Adventurous) and their investment time horizon.  The portfolios are regularly reviewed by our specialist investment team and adapted accordingly to any changes in the wider economic climate.  All portfolios (whether ESG or “standard”) are managed to ensure that the portfolio performance underpins our client’s wider financial planning needs and objectives.

How can I receive advice?

We will always offer potential clients an initial meeting which is free of charge and comes with no obligation. This is therefore a great starting point to enquire as to how we may be able to help you plan for a more sustainable future.  Maybe the New Year merits a new investment approach?

If you’d like to discuss ESG investing or any area of financial planning, then please send me an email at [email protected]