ESG investing has boomed in popularity. The wealth of information, a fear of getting it wrong, and not knowing where to start are barriers to getting ahead in this realm.
We’d like to lower those barriers. ESG investing doesn’t need to be complicated, and it’s for everyone. In fact, we’re all ESG investors now.
Spelling it out
Investing with Environmental, Social or Governance (ESG) factors in mind is what ESG investing’s all about. Sadly, a lot of the time investors think it’s an approach reserved for environmental crusaders and means giving up financial returns.
It isn’t and it shouldn’t.
ESG covers an enormous subject area, and the investing styles within it sit on a broad spectrum. We think it’s important investors pay more attention to ESG issues when making decisions. But that doesn’t have to mean sitting huddled over a company’s CO2 data, or limiting yourself to investments in wind farms. It doesn’t even have to mean avoiding ‘sin’ stocks.
In most cases, ESG is just good business sense.
This article isn't personal advice. If you're not sure if an investment is right for you, ask for advice. All investments and their income can fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future.
Best-in-class
This approach to ESG investing doesn’t mean picking the companies doing the ‘best’ when it comes to doing the right thing.
It’s about choosing the company that’s doing more, and is better future-proofed than its peers. We think there’s a strong argument to say that everyone should consider this approach.
Best-in-class doesn’t exclude any type of company.
Take, for example, two very similar oil & gas companies. Company A might have really detailed ESG disclosures in its annual report, and be allocating a lot of resource to exploring renewable energy. Company B might look very similar, but it doesn’t seem to have a clear renewable strategy and its ESG details are thin on the ground. We covered this scenario in more depth recently.
What does a green oil and gas company look like?
Best-in-class would simply mean investing in company A over company B. You’re still buying an oil & gas asset, which some might assume could never be an ESG choice, but you’ve chosen to go with the ‘better’ option.
You don’t have to have particularly strong environmental views to think that Company A is better placed to manage any future transition away from carbon emitting fuels. That’s clearly a risk for the sector, and managing that risk effectively makes Company A more attractive.
Who’s this approach for?
Put simply? Everyone.
A best-in-class approach considers ESG concerns alongside other more traditional investment factors. This approach, as much as any other factor, is an important tool for limiting risk. A company making more effort to align itself with a carbon-neutral future, proactively pursuing a diverse corporate culture, or looking to exclude child labour from its supply chains is a business with better strategic oversight in general.
Given the choice, isn’t that a business you’d rather trust to potentially boost returns over the long term, compared to one that isn’t looking where it’s going?
Transition Risk
At the risk of repeating ourselves, this is something long-term investors really need to think about. The world is changing. And, thanks to the pandemic, a lot of changes are speeding up.
Regardless of where you sit on the ESG spectrum, investors should be considering if what they’re investing in is doing enough to prepare for the future.
This stems all three of the ESG pillars: is a company getting ready for Environmental changes? Does it have sufficient strength of Governance to avoid costly PR blunders, and operate in a safe and efficient way that will enhance value for shareholders? And does it care about its Social responsibilities, or does it risk being left behind the times, as attitudes and understandings continue to change at pace?
If you’re keen to make a difference
We understand some investors want their financial decisions to proactively encourage change.
This is known as the ‘impact’ side of ESG. This is for those that want their investment to drive good outcomes across wider society. It tends to include investing in industries that will make a positive difference, like renewable energy or sustainable agriculture.
The key thing to remember with this type of investing is it’s about proactively encouraging change. Impact investors are often prepared to give up some financial return in order to drive better social or environmental outcomes. That puts them among the most ‘hardcore’ of ESG investors.
What about a wider theme?
An alternative to impact investing is thematic investing. Thematic investing can be applied to any investing strategy – ESG or otherwise.
A thematic investor will identify a macro-level trend and choose investments that stand to gain from this trend. In an ESG context, this trend could be based on anything from gender equality to increasing recycling.
Done well this approach shouldn’t mean giving up financial return, and might even generate better returns. After all, investors often try to benefit from trends like increased ecommerce. Why would you exclude environmental and regulatory trends like decarbonisation from that approach?
However, there are challenges. Limiting yourself to ESG trends alone shrinks your investment options, and, all things being equal, that will reduce your overall return.
Pure ESG thematic investing is still a fairly extreme approach, and it’s not for everyone.
How do I find out about a company’s ESG credentials?
The annual report is a good place to start. You can find specific ESG disclosures here, but it’s also worth reading the chairman’s statement. This will give you an idea of the tone of the company’s approach to the future – and the sensible ones will talk about things like sustainability and/or governance.
For those that want to take a bit more of a hands-off approach, take a look at our guide to responsible investing. Or keep your eyes peeled for the rest of this week when we’ll be offering ESG investment ideas, tools and insight to fit a wide range of ESG appetites.
Our guide to responsible investing
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