ESG balances gains and sustainability: Research busts 2 common myths

While ESG and sustainable investing are rising in popularity, there are still common misconceptions, such as investors needing to sacrifice financial returns to incorporate ESG factors into their portfolios. However, statistics indicate this isn’t necessarily the case.

Uncertainty and volatility have marked the last 12 months for investors, but ESG (environmental, social and governance) investing has continued to gain ground. While there continue to be misconceptions about ESG, statistics indicate that it could form part of your portfolio without you needing to sacrifice financial returns.

What is “ESG investing”?

ESG investing considers environmental, social and governance issues when investing. This doesn’t mean you ignore the traditional factors when investing in this way, such as your risk profile or long-term performance. Rather, ESG factors are additional measures aimed at complementing traditional investing processes, not replacing them.

When incorporating ESG, you focus on sustainability. For example, does a company have a poor track record for human rights amongst its employees and wider societal stakeholders? Are its operations energy-intensive? And how are executives compensated? How is the company structured and governed? Have the company committed to greater diversity and achieved meaningful change? These types of questions can help evaluate a company’s behaviour and policies to determine its future financial performance and potentially mitigate risks around ESG factors. You can also use them to align investments with your values.

ESG investing isn’t a new idea but it’s becoming more popular.

UK savers put almost £1 billion a month, on average, into “responsible investment” funds in 2020, according to the Investment Association. Assets under management have grown over 66% in the past 12 months alone. The pandemic has provided a chance for investors to reappraise what they want to achieve from their investments and consider greater alignment with their beliefs and values.

Despite the growth in ESG investing, there are still common myths that could put off potential investors.

Myth 1: ESG investing means lower financial returns

A common misconception is that investors who incorporate ESG and sustainable investing into their investments will automatically need to give up some of their investment returns. While returns can never be guaranteed, new research and statistics show this isn’t necessarily the case.

2020 was an eventful year in the stock markets. The Covid-19 pandemic and government responses around the world affected companies and their profitability. As a result, investment portfolios experienced volatility.

In a report, BlackRock assessed how well 32 sustainable equity indices worldwide have performed compared to their non-sustainable benchmarks. The results suggest that ESG funds can result in less volatility and better performance. Between the start of January and the end of April 2020, 88% of sustainable indices outperformed their equivalent non-sustainable indices.

It’s important to keep in mind that these figures only represent a short timeframe, and you should invest with a long-term strategy in mind. However, they do indicate that investors do not automatically lose out financially, simply because they’ve chosen to incorporate ESG strategies. In fact, ESG strategies could help investors experience lower levels of volatility by mitigating some of these ESG risks.

Myth 2: ESG investing is more expensive

It’s not just investment performance that affects the returns you receive, but the cost of investing too. Traditionally, ESG investing has been a more expensive option, potentially eating into net of charges returns. However, this is changing.

The myth comes from the fact that ESG investing has typically meant taking an active investment strategy.

Active investing requires a hands-on approach, with a fund manager and their team actively buying, holding, and selling stocks to beat a benchmark. This means undertaking a lot of research and work. In contrast, passive investing aims to deliver returns that are in line with the market by tracking certain indices. Passive fund managers don’t pick which investments to hold in their funds. As a result, active funds are usually more expensive in terms of fees.

ESG investing has often been associating with active investing because of the initial and ongoing research required. However, as it’s become more popular among investors, there are now passive ESG investing options, helping to keep costs down.

While an active investment strategy aims to outperform benchmarks, research suggests passive investing can deliver the same or better returns. The Morningstar Active/Passive Barometer found that in the first half of 2020, just 51% of active funds both survived and outperformed their average index peer.

Much like choosing an ESG strategy, choosing a passive investment strategy doesn’t mean missing out on returns. What is important is selecting investments that are right for you. This means considering your goals, timeframe, attitude to risk, and much more.

Introducing our ESG passive funds

We know that investors are increasingly keen to explore ESG investing options while maintaining their returns. That’s why we’ve launched our own passive ESG investing range. Our Passive Sustainable Dynamic Portfolios give you the option to do more with your savings and investments than purely generate a competitive financial return.

Declan McAndrew, our Head of Investment Research added: “Our Sustainable Dynamic Portfolios have been carefully designed to balance investment risk with returns to help achieve clients’ financial goals, taking into account different attitudes to risk, time frame, capacity for loss and crucially environmental, social and governance (ESG) criteria.

“Within this new range, as within our Active Sustainable Dynamic Portfolios, we have focused on combining internal and external expertise to build portfolios that will proactively adapt to this rapidly changing and exciting field.”

If you’d like to discuss this range, whether it would be a suitable option for you, or how to make ESG part of your investments, we’re here to help.

Please email us at advise-me@fosterdenovo.com or call us on 0330 332 7866 to speak to one of our team and arrange a meeting with a local financial adviser.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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. 

The FD Sustainable Dynamic Portfolios are managed by FD Dynamic Portfolios Limited (FDDPL), which is an appointed representative of Foster Denovo Limited, which is authorised and regulated by the Financial Conduct Authority. FDDPL has issued this in its capacity as investment adviser to the investment manager, AB Investment Solutions Limited, which is authorised and regulated by the Financial Conduct Authority.