Good Money Week: Why ESG investing is a growing trend

Good Money Week kicks off on 24 October 2020. The annual awareness event aims to encourage more people to think about sustainable options when banking, saving or investing. Sustainable or ESG (environmental, social, governance) investing, in particular, is on the rise.

According to a report in the Financial Times, by 30^th July 2020, more than $38 billion in new money poured into ESG-themed exchange traded funds (ETFs) this year alone. It means these funds topped $100 billion in total assets for the first time. By 2030, it’s thought that the figure could reach $1.3 trillion. So, if you haven’t already, it’s worth considering if ESG investing is an option that could suit you.

What is ESG investing?

ESG investing means considering non-financial factors when selecting investments. These factors are split into three areas – environmental, social and governance. This means that potential investments are assessed based on traditional criteria, such as financial performance, and how the company operates, both internally and externally.

The three ESG categories are broad and cover a range of different factors.

• Environmental factors take into consideration the impact that companies are having on the planet today and in the future. This may include pollution, emissions, renewable energy and recycling.
• Social factors consider the impact the company is having on people in the world. This could include human rights, working conditions and relationships with customers and people within the supply chain.
• Governance factors consider how the interests of all stakeholders are affected by the company’s activities. This may include looking at corruption, equality and diversity, and compliance with health and safety regulations.

It’s important to note that ESG factors don’t replace traditional criteria but aim to complement it. The financial performance of an investment is still essential, even when ESG is considered. As is understanding the risk of an investment, how it suits your goals and making sure you have a diverse portfolio.

Why is ESG investing on the rise?

There are many reasons why an investor may want to explore ESG investing but the two most common reasons are long-term financial performance and ethics.

1. Financial performance

ESG investing looks at a range of areas that can present both opportunities and risks to businesses in the long term. The aim of this isn’t only to select those businesses that are operating responsibly but to also assess long-term financial returns. As we invest with a long-term outlook, investing in companies that are focused on the future can support your financial goals.

For instance, a company that operates in the fossil fuel industry and isn’t investing in alternatives could find that as governments bring in legislation to reduce emissions and invest in renewable sources that their profits fall, impacting investors. In contrast, a fossil fuel firm that’s investing in tidal energy or carbon capture and storage is likely to find themselves in a better position long term. As a result, incorporating some ESG factors can support long-term investment goals.

2. Reflecting your values

For some investors, reflecting their personal values in their investment decisions is also important. They want to invest in a way that has a positive impact alongside delivering a financial return. In a similar way to how you may select ethical products when shopping, ESG investing can help you invest in companies that align with your values.

Reflecting values when investing isn’t a new concept. In fact, it can be traced back to the mid-1700s when Quakers were banned from participating in the slave trade because it didn’t align with their ethics. Though it’s evolved significantly over the years to encompass more areas and create strategies that don’t simply mean cutting some investments out.

However, there are challenges here. Values and ethics are highly subjective areas and priorities between investors can vary significantly. As a result, some compromise may be needed, and we suggest investors focus on progress, not perfection when weighing up ESG investing options.

Does ESG investing mean lower returns?

It’s a commonly held misconception that ESG investing automatically means lower returns. While we can’t guarantee how investments will perform, research indicates that the opposite could be true.

Research found close to six in ten sustainable funds delivered higher returns than equivalent conventional funds over the last ten years. The study looked at the long-term performance of 745 Europe-based sustainable funds to demonstrate ESG investing doesn’t necessarily mean missing out on financial returns but can add value to investment strategies.

Talk to our financial planners about ESG investing

If you’d like to discuss your current investments and how ESG factors could be incorporated, please contact us on 0330 332 7866 or email advise-me@fosterdenovo.com to talk to one of our expert financial advisers. We’re here to help you understand how investments can help you meet your long-term financial and lifestyle goals.

Please note: The value of your investment 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.