Followers of the financial media over the last few months might have noticed an increase in coverage of ESG (Environmental, Social, Governance) investing popping up in their papers and being trailed on their timelines.
ESG is a style of investing that focuses on companies, organisations and funds that seek to create a positive social and environmental impact through their products and activities. It allows investors to express their ethical views through their choice of investments.
The recent raised profile is down to ESG enjoying a spike in interest concurrent with the coronavirus lockdown. In one poll, 85% of Independent Financial Advisers surveyed said they had seen a rise in client requests to allocate capital to ESG funds since the start of the virus outbreak.
Making the connection
The natural next question would be: is there a connection between the unprecedented global circumstances we’re living through and a redoubled interest in this area of investing? Looking more closely at the principles of ESG investing gives us an indication. A focus on corporate responsibility, good governance, treatment of staff, social and ethical stance of a business are all key drivers of this investing approach.
The coronavirus has led to an increased emphasis on supporting one another and meeting our responsibilities to others in all spheres of our lives and it’s natural that this should extend to the behaviour of businesses. The relationship between a business and its employees has been fundamental to how successfully we, as a global society, have protected ourselves against Covid 19. It’s in this heightened atmosphere of compassion and responsibility that investor interest in ESG options has increased.
A Morgan Stanley report from early on in the pandemic’s spread aimed to capture this investor instinct:
“Corporate behaviour in a time of crisis—both in how companies treat employees and customers, and their impact on society in a time of need—can have lasting implications, both positive and negative… These factors can be linked to long-term performance and returns.”
While interest and positive sentiment towards ESG investing has increased of late, it is not without its critics. There is the perception among some that in order to stick to their ethical principles, thereby limiting their investment choice, an investor should expect to sacrifice some of their return.
Then there are the grey areas and moral quandaries. For example, you might find a business which does not meet ESG criteria but which has a defined and proven mission in creating products that save or improve our lives, generating jobs and contributing significant sums to the economy. On balance is this business ‘good’ or ‘bad’?
The definition of what constitutes an ESG company can be highly subjective and this can play out at sector as well as company-level. As an alternative to fossil fuels, nuclear power could be a seen as an environmentally responsible industry; in its potential for damage from nuclear accidents, quite the opposite. It’s also worth noting that many companies that claim to be socially responsible may not end up being quite so consistent with ESG principles once you get a look under the bonnet.
Gathering support from advisers
Advisers themselves have been criticised in the past for their perceived lack of interest in ESG and shouldered the blame for what some have regarded as the slow take-up of ESG options. However, stepping out of the Covid 19 bubble for a moment, and looking further back, there is evidence to indicate that advisers, as well as clients, are warming to ESG options.
FE Fundinfo’s Surfing the Wave Financial Adviser Survey, published in May 2020 and based on data compiled in November and December 2019, found that “55% of advisers said the amount invested into ESG investments had increased last year and the biggest asset allocation changes were in favour of ESG funds.” Additionally, of the 200-plus advisers polled, none of them had decreased their ESG investments.
Our ESG options
ESG investments have been present in our portfolios for some time as part and parcel of a modern investment strategy. The emergence of new funds is not only increasing the investment universe, but it allows us to add diversification, focus on costs and potentially improve performance.
Progeny Asset Management offers a range of ESG Portfolios, established in 2018 and designed with a focus on funds that seek to create a positive social and environmental impact. They are a cost-effective option for investors looking to invest in this space, through a series of funds that adhere to ESG principles and all looked after by our experienced investment management team.
If you would like to discuss your options for ESG investing, please get in touch.