ESG: Investing with Impact
It’s no secret that the growth of Environmental, Social and Governance (ESG) investments in recent years has been fundamental.
This has largely been fuelled by the climate emergency, leading to growing scrutiny of company practices with some governments mandating a change in companies’ and individuals’ behaviour.
The idea behind ESG investing is that corporations which respect these three pillars in their business practices will achieve long-term value creation.
From tackling climate change, to equal rights and animal welfare – you can select investments aligned with your values in a way that could help you achieve your long-term financial goals.
APPETITE FOR SUSTAINABLE INVESTMENTS
COVID-19 has undoubtedly heavily influenced some investors’ agendas, driving a re-evaluation of the environment and ‘what matters most’. Data from ‘The Power of Advice’ report[1] shows how for one in two investors (51%), the pandemic has fuelled their appetite for sustainable investments.
45% went further still, saying that they now only want to invest in ethical companies and funds. In fact, only 11% of the sample (across all generations) said they didn’t intend to invest in ESG investments over the next five years.
YOUNGER PEOPLE HAVE A ‘KEY ROLE TO PLAY’
Furthermore, 39% of clients said they expected to increase the amount they invested in socially responsible investments, 31% maintaining their current level and just 5% decreasing their spend.
Younger people have a ‘key role to play’ in the move towards sustainable investing, according to the report. It revealed younger family members (42%), societal pressures (47%) and media commentary (53%) were the top influences for people considering sustainable investing.
EVERY LEVEL OF BUSINESS DECISION-MAKING
Once upon a time, the concept of ‘sustainability’ was confined to environmental and social issues, but it is now factored in at every level of business decision-making. The awareness of ESG has increased over recent years and these factors are becoming more important in the investment decision-making process of investors.
For many, the pandemic has prompted a change in financial priorities, accelerating the demand for responsible investing.
WE CAN’T AFFORD NOT TO CARE
The three pillars of ESG cover a wide range of issues:
- Environmental
Investors, consumers and governments are placing renewed emphasis on climate change and sustainability. This factor examines the extent to which a company is taking a ‘green’ approach. The number of potential criteria within the environmental factor is vast. It might, for instance, involve analysing how dependent a business is on fossil fuels, how much waste it is producing or how it treats animals.
Alternatively, it might look at any significant environmental risks that a business is taking, such as if it regularly fails to meet government regulations. Factors include carbon emissions, water usage, pollution, packaging waste, sustainable building, land usage and energy efficiency.
- Social
This examines how the company manages its relationships with people including employees, suppliers, customers and local communities. In terms of employees, this criteria might include whether a business has any diversity or inclusiveness policies, or how it treats its staff.
When it comes to suppliers, this assesses the businesses a firm works with, for example, whether a manufacturer outsources production to factories with poor practices. Treating customers fairly is also likely to have a long-term impact on performance and may cover whether the business has sufficient consumer protection in place.
Many consumers and investors want businesses to benefit society, so an ESG investor may look at whether a company helps people it doesn’t necessarily buy from, sell to or employ. Factors include employee health and safety, supply chain labour standards, privacy and data security, product safety and employee developments.
- Governance
The reasoning behind analysing a company’s governance practices is clear. A business that is run properly is more likely to succeed over the long term than one that isn’t. When it comes to assessing a company’s governance, common criteria can include whether it uses open and transparent accounting practices or whether shareholders can vote on important decisions.
It also looks at how much it pays its board, including bonuses, board diversity, and how much it spends on developing new products and services. Factors include business ethics, corruption and political instability, conflicts of interest, and tax transparency.
LOOKING TO INVEST FOR A BETTER FUTURE?
We all want to make responsible choices as more of us are becoming aware of global challenges, such as environmental issues, human rights, and climate change. In recent years, ESG and ethical investing have moved from niche strategies to a mainstream part of investing. To discuss how we can help you, please contact us.
Source data:
[1] The Power of Advice Report – Pru part of M&G Plc – https://www.mandg.com/ sustainable (2021)
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The information contained in this article is intended solely for information purposes only and does not constitute advice. While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article.
