What is ESG investing, and how do I know if it’s right for me?
ESG investing could be a good solution if you want to use your money to invest in and support companies that align with your values.
Diversity. Climate change. Fair pay. These socially-minded topics have become increasingly important in recent years. The COP 26 conference has focused worldwide attention on how we need to reassess our values.
It’s perhaps no wonder therefore that these subjects are becoming more important in how and where investors are allocating their money, as they realise profit and good business practices don’t have to be mutually exclusive.
So what exactly do we mean by “ESG Investing”?
ESG stands for three broad categories investors can use to evaluate companies:
Environmental, Social, and (corporate) Governance.
- Environmental criteria consider how a company handles conservation and protection of the natural environment.
- Social criteria look at the relationships a company has with their employees, customers and communities.
- Governance criteria are focused on how a company runs itself looking at factors like executive pay, shareholder rights, audits, and so on.
Each of these categories covers slightly different factors and fund managers and financial institutions all have their own way of evaluating companies.
For example, one institution might have an ESG offering that avoids exposure to industries that are perhaps considered controversial sectors like coal, tobacco or firearms.
ESG Investment Performance
In the past, it was generally believed that an investor had to choose between good returns or ESG investing. As the market has placed increasing value on good ESG practices this trade-off is now not necessarily the case.
For example, the move to green energy is now seen as a huge commercial opportunity as well as an environmental necessity.
It is very hard to historically disentangle the effects of ESG from all of the other factors affecting investment performance, but there is an emerging consensus that, looking to the future, there will be an increasingly favourable environment for ESG investments as they reflect the changing priorities and values of the general population.
Positive and negative screening
Negative screening means excluding companies that don’t align with an investor’s morals or values while positive screening actively searches for companies that are prioritising certain values and activities.
While negative screening has been historically used by ESG investors, positive screening is becoming increasingly popular. Knowing that your money is being used in areas that are important to you provides a non-tangible benefit for the investor that should not be overlooked when considering ESG investment choices.
Keep in mind that ESG covers a vast area of activity and companies will not always want to or be able to prioritise every element, so it might be a good idea to prioritise which criteria are most important to you and seek out funds and companies that follow those specific factors.
The value of investments may fall as well as rise. You may get back less than you originally invested.
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Please get in touch if you would like to know more and discuss the options in this complex but potentially very rewarding area.