The Rise in Environmental, Social and Governance Investing
Total global investments in ESG have hit $1trillion (£705bn) since the outbreak of Covid-19.1
Investors are increasingly applying these non-financial factors as part of their analysis to identify growth opportunities and to identify material risks.2
The outbreak of the pandemic seems to have reinforced the interconnectivity of our human system, together with hard hitting documentaries on the impact of climate change by David Attenborough and coverage of activists such as Greta Thunberg and Extinction Rebellion. More recently, there has been extensive coverage of COP26 in Glasgow. Against this backdrop, investors are increasingly asking questions relating to what companies are in their investment portfolios and what sort of impact these companies are having from an environmental, social or governance perspective.
What is ESG investing?
The ‘E’ in ESG stands for Environmental themes such as pollution, deforestation, climate change and water management.
Social themes surround issues such as standards of labour, human rights and gender diversity within companies.
Finally, Governance relates to the running of the company, such as its board composition, executive pay structures, lobbying and political donation histories.
Investors, such as most of us who have a workplace pension, will typically trust their pension fund managers to raise these important issues at shareholder meetings and to use their voting clout to curb perceived poor practice. This, however, does not always happen and some fund managers have better voting records than others.
Investors are now able however to access funds that are entirely focused on ESG themes. Such funds can avoid specific areas of concern, such as oil and airlines which are perceived as large polluters in favour of companies which are using new technologies to improve the quality of water or to improve access to healthcare for instance.
Is there a danger of avoiding ‘sin’ sectors when choosing investments?
The choice of screening out polluting companies can be emotive and will depend on each person’s own view. There is a risk that denying these companies investment will create even worse behaviour and lower standards. Furthermore, it can be argued that companies will require capital from our pension funds for instance, to help them transition. A well cited example of this is ORSTED, which was previously the Danish Oil & Gas Company and one of the worst Danish Co2 polluters.3 Having undergone a transition, ORSTED is now a £48bn renewable energy firm and a role model in the energy sector. They were able to do this by selling off businesses, as well as raising capital to allow it to transition.
How do I go about investing in ESG?
It is important to be aware that there is no standard approach for measuring the ESG metrics and one person’s view of an ethical investment may well differ from another’s. With this in mind, any investor interested in exploring the credentials of their own investment should find out what the ESG policy is of their funds. They should ask their pension fund provider regarding their voting record and how ESG is integrated into their processes. If they find that the responses do not fit with their own views, then they should ask regarding ESG themed funds or seek professional advice. If you need further information, please contact Bruce Hendry at bhendry@thomsoncooper.com.
Source :
- Morningstar, Feb 2021
- CFA Institute, September 2021
- Osmosis, Case Study 2020