Environmental Social Governance: What You Need to Know Before Investing

When it comes to investing, there are a lot of things to think about. You need to consider your risk tolerance, investment goals, and time horizon. But these days, you should also be thinking about ESG factors. Environmental, Social, and Governance (ESG) investing is becoming more and more popular among investors who want to make sustainable investments. ESG investments aim to allow investors to align their goals with those of the companies in which they invest. In a world where climate change, social movements and political uncertainty are so prevalent, it's not hard to see why so many people are keen to ensure they are investing conscientiously and striving to make a positive impact through their money.

In this blog post, we will discuss what ESG investing is, why it's important, and how you can get started!

Background - The History of ESG

ESG, as a matter of socially responsible investing, is not a new concept. However, it has grown in popularity around the globe in recent times. The roots of ESG investing date back to the early 1800s when a Quaker named Anthony Benezet campaigned against slavery.  Benezet believed that investors could use their money to promote social good. In the 1970s, a group of activists known as the "Angry Young Men" urged institutional investors to divest from companies doing business in apartheid South Africa. Their work led to the creation of the first socially responsible mutual fund in 1976. The fund screened out companies with poor environmental and social records.

The 1990s saw the birth of the modern ESG movement, as investors became increasingly interested in the environmental and social impacts of their investments. In 2001, the United Nations issued a report called "Investing in the Environment: A Guide for Institutional Investors" which outlined how investors could incorporate ESG factors into their decision-making process.

In recent years, there has been a lot of talk about the role of ESG in financial markets. In 2015, the Task Force on Climate-Related Financial Disclosures (TCFD) was formed to develop recommendations for voluntary climate-related financial disclosures. The TCFD is chaired by Michael Bloomberg, former Mayor of New York City and founder of Bloomberg LP. The TCFD released its final recommendations in 2017. The report recommends that companies disclose their exposure to climate-related risks, strategies for managing those risks, and how they are addressing climate change.

Understanding the Concept of ESG

So why should I take into account ESG prior to investing?  Well, ESG factors are the environmental, social, and governance considerations that can affect a company’s long-term profitability and sustainability. These factors can include things like climate change risk, human rights violations, or unethical business practices.

ESG investing is the process of incorporating these factors into your investment decision-making. There are a few ways to do this. You can invest in companies that have strong ESG policies and practices, you can avoid companies with poor ESG records, or you can invest in sustainable or responsible investing funds.

There are a lot of benefits to investing in this way. ESG investing can help you reduce your risk, because companies with strong ESG policies are less likely to experience negative events like fraud or environmental disasters. It can also help you achieve your financial goals, by aligning your investments with your values.

Below is a list of the types of issues ESG investments can aim to tackle:

• Investment in and financial support of companies that reduce their carbon footprint, supply and use green products, and deploy renewable energy
• Support of companies that aim to achieve zero net emissions from greenhouse gases by the year 2050 under the EU Green Deal
• Separating economic advancement from the depletion of natural resources
• Improving the quality of life for citizens
• Stopping deforestation

ESG investing is also becoming more and more popular among institutional investors. A report by the Global Sustainable Investment Alliance found that, in 2016, sustainable and responsible investing assets worldwide reached $22.89 trillion, or 26% of all global assets under management. That number is only going to continue to grow, as more and more investors become interested in ESG and sustainable investing.

Getting Started in ESG Investments

The first step in implementing ESG factors into your investment decision making process is to understand your options. There are a lot of different ways to invest in ESG. You can invest in individual companies, you can invest in sustainable or responsible investing funds, or you can invest in screened mutual funds.

The next step is to figure out what's important to you. What are your values and priorities? Do you care about the environment, social justice, or corporate governance? Once you know what's important to you, you can start looking for investments that align with those values.

Any investment portfolio can benefit from an ESG strategy. However, it is important to closely appraise and research the companies you are looking to invest in. Talking to a financial advisor, such as those we have here at FitzGerald Flynn, is a great place to start. They can help you figure out what's right for you and your portfolio.

ESG Investments that Work and Those That Do Not

Strong returns are at the heart of any investment. ESG investments are no different in this respect. Of course, money invested ideally ought to have a positive global impact, but that does not require investors to forego robust returns on capital. ESG funds can even carry a lower risk than some conventional ones. Across all asset classes, ESG investments that support climate change initiatives and socially responsible efforts have shown a lower downside risk. 

There are a number of ESG investments with compelling long-term returns. The MSCI ACWI Low Carbon Target Index, for instance, has outperformed the standard MSCI ACWI All Country World Index since its inception in 2008. Another example is Impax Asset Management’s Global Environmental Markets fund, which has achieved an annual return of 11.64% since inception in 2004.

On the other hand, some investors have lost significant sums of money by backing companies that ultimately failed to live up to their ESG promises. The high-profile collapse of Enron is a case in point. The company had established itself as a pioneer of sustainable energy but was revealed to be engaged in widespread accounting fraud. The scandal led to the loss of billions of dollars for investors and employees, as well as damage to the reputation of sustainable business.

When considering an ESG investment, it is therefore crucial to ensure that a company’s reported performance is based on solid financial foundations. This can be done by analysing a company’s financial statements and annual reports, as well as by reading expert analysis of the firm in question. Here at FitzGerald Flynn, we take care of this taxing workload and provide our clients with the best ESG investing advice possible.

The Future of ESG Investing

The future looks bright for ESG investing. More and more investors are becoming interested in sustainable and responsible investing and there is a growing body of evidence to show that ESG investments can be profitable. With recent reports from Broadridge Financial indicating that ESG assets could be set to surpass $30 trillion USD by the end of decade, it’s hard to see the growth of ESG in the investment world slowing down.

There are a number of challenges that need to be addressed, however. One is the lack of data. It can be difficult to find accurate and up-to-date information on a company’s ESG performance. This is something that needs to be improved if sustainable investing is to become mainstream. That being said, developments in technology in recent years means that investors can access trustworthy data relating to companies far easier than ever before. The increase in quality of data analysis now means that advisors can produce far more accurate forecasting and investment models to aid investors with their ESG investments. 

Another challenge is the fact that, while there are a growing number of sustainable investment funds, there are still relatively few options available to investors. This is something that needs to change if sustainable investing is going to become more popular.

Finally, it is important to remember that ESG investing as we know it today is still a relatively new concept. It is therefore important to keep up with the latest developments in the field and to be prepared for changes in the way that ESG investing is done. This is why getting in touch with an experienced and research oriented financial advisor, such as the experts we have here at FitzGerald Flynn, is so important. 

Grades and Ratings for ESG Investments

ESGI, MSCI ESGI, and Sustainalytics are all among the top rating agencies for ESG investing. MSC ESG ratings are a standard barrier for many industries. The ratings range from CCC, which is the 'Laggard' designation, to BBB, in the ‘Average’ category, to AAA in the 'Leader' column.

Long-term performance and resilience are a part of the reasoning behind these ratings. It aims to clarify who is doing the work to align with sustainable practices. Companies that lay their stance on effecting social issues and climate action out front often have a high rating among these systems.

Conclusion

It's hard to see a way in which ESG won't continue to grow. With more and more investors looking to make a difference with their money, and an increasing number of options available, there is no reason why ESG investing shouldn't continue to go from strength to strength. 

If you're thinking about making an ESG investment or are interested in learning more about ESG and sustainable investing generally, please get in touch now.

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