The growth in ESG (environmental, social and governance) investment in recent years has been remarkable.
According to Bloomberg, in 2021 ESG investments totalled $2.7 trillion (around £2.2 trillion) – a rise of 53% from the previous year.
Furthermore, it’s estimated that, by 2025, total investment in ESG funds is expected to exceed $53 trillion (£43 trillion) and make up a third of total assets under management worldwide.
Here, you can find out more about ESG investments, the performance of ESG funds, and a couple of potential issues you need to be aware of if you’re considering including ESG investments in your portfolio.
Investing with environmental, social and governance factors in mind
As you’ve already read above, socially responsible investing has become big news over the last few years. Seeing the growth and demand, many investment management companies are looking to add ESG funds to their range, for both individual and institutional investors.
It’s likely that, outside your own property, the bulk of your future wealth – particularly in retirement – will be derived from investments. If you’re looking to build an ethical portfolio, it’s important to understand what ESG investment means, and how it’s quantified.
ESG criteria are measured under three factors:
- Environmental – including the conservation of the natural world and contribution towards reducing the impact of climate change.
- Social – such as the effect a certain company’s ethos and practice has on individuals, both externally and within the company itself.
- Governance – in terms of how the company itself is run, covering issues such as financial transparency and its relationship with the environment within which it operates.
When it comes to putting your investment portfolio together, ESG can be as much of a guiding issue as your attitude to risk, the time horizons over which you invest and your capacity for loss.
ESG investments can outperform traditional investments
Clearly, as with any investment, performance is a key factor.
At a very high level, individual companies that rate highly on many ESG scorecards tend to be well-run businesses. They can be more risk-averse when it comes to managing their business affairs in general. This is likely to result in a more conservative, less speculative attitude to finance that makes them more resilient during market downturns.
In a report at the end of 2020, investment analysts Morningstar reported that, during the market downturn caused by the worldwide pandemic, sustainable funds had outperformed more traditional, non-ESG, funds by up to 1.83%.
Furthermore, Morningstar also found that the majority of ESG strategies have done better than non-ESG funds over a series of investment time frames up to 10 years.
A separate report in 2021 from leading investment managers, Fidelity, came to a similar conclusion.
Of course, considering ESG factors is no guarantee of investment performance. As with any stock market investment, you’ll still experience short-term volatility and there is always some risk involved.
The issue of greenwashing
The huge rise in ESG investment has inevitably resulted in fund managers and individual companies taking steps to enhance the ESG credentials of their funds and company respectively to attract new investors.
This has resulted in the rise of “greenwashing” – a company marketing itself as being more socially and environmentally conscious than it may be in reality.
Often greenwashing results in the truth about a company being obscured by jargon and warm words when the reality might not tally with what’s reported.
The Financial Conduct Authority (FCA) which regulates investments in the UK have expressed concern about the increasing incidences of greenwashing. They are due to shortly publish a report giving formal guidelines for ESG investment.
At this stage, if you’re looking at ESG investments yourself, it’s wise to do some research. If you’re investing yourself, make sure you research the underlying funds and check that the holdings are as ethical as they say they are.
Decide what matters to you if you’re thinking of ESG investment
As you can probably appreciate, the scope of ESG investments can be vast. If you’re thinking of investing ethically, it’s therefore worth taking some time to consider exactly what matters most to you when deciding where to invest.
Take some time to examine your values and identify what is most important to you.
For example, you may have particular concerns about how companies treat their staff, and the effect a company’s activities have on people in the area where that company operates.
Alternatively, your top priority may be the current climate emergency and therefore the sustainability policies of a company will be your key consideration.
There are a plethora of ESG funds available to invest your money in, so we would strongly recommend you get specialist investment advice before going ahead.
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At bdhSterling, we have extensive experience in helping clients build robust investment portfolios, including ESG options.
Get in touch to find out how we can help you.
