I hope that when our children and grandchildren look back on our era, they’ll see it as a time when we, as a species, became aware of the impact we are having on our planet and took action to try to save it. It’s fairly obvious that we have done some damage and there are some challenges that now require all of us to consider how best we can make a positive contribution and try to reverse or slow down the effects. Despite our attempts to do our modest bit by recycling or reducing our carbon footprint, few of us have considered how our investing can make a difference. Until recently.
If you’ve been keeping an eye on the financial media in recent months, you’ll have noticed the steady increase in references to ESG investing. It’s capturing the attention of fund managers and investors alike, as well as commanding more and more of the aforementioned media column inches. So, what is ESG?
Environmental, Social and Governance investing – to give it its full title – 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’s also broadly referred to as ethical investing, sustainable investing or impact investing. In short, ESG answers a demand from investors to express their ethical views through their choice of investments. As well as the capacity for doing good, it can also offer the chance to capitalise on niche market opportunities.
Tailored to Investors’ Preferences
ESG investing has dramatically increased in popularity in recent years and it’s believed that fund managers are administering nearly $23 trillion in the broad area of sustainable investments (approximately 25% of entire global investment under management). Research from BlackRock shows that the specifically ESG-dedicated investment fund universe is also growing, with combined European and US mutual funds and exchange-traded funds amounting to around $750 billion1. While investors might have been cautious about ESG in the past it now appears to be on the brink of significant growth as they set aside their reservations.
Behind the Boom
One of the common objections to ESG was the fear that investing with your principles would mean you would need to sacrifice on your expected return. A recent survey found that 57% of the investors they questioned believed that ESG would require a ‘financial trade-off’, with proof of ESG performance remaining the key deciding factor for investors. However, an industry report on ESG conducted earlier this year suggests that this is a misconception that now seems to be losing traction: “It appears that large institutional asset owners may be replacing this view with a more sophisticated recognition that ESG factors provide unique insights into long-term risks and opportunities that might not be captured by traditional financial factors. The belief in a trade-off appears to be fading.” It’s also worth remembering that ESG doesn’t need to be an all-or-nothing commitment: it can be combined with more traditional investment styles and be tailored to suit your own investing preferences.
Regulation has played a part in the increased adoption of ESG. Countries where the authorities require businesses to disclose various details on, for example, their environmental impact or their corporate behaviour will lend themselves more readily to gathering the data required for the ESG rating of an organisation. ESG ratings are intended as an easy way to evaluate a company’s engagement with sustainable business methods. They’re measured on the specific issues most relevant to the industries they operate in as well as their commitment to corporate governance. A key benefit is that they can give investors a fuller understanding of a company’s behaviour, putting them in a better position to make investment judgments.
There are downsides to the ratings system, like the quality, reliability and consistency of the data, not to mention the fact that most ESG reporting doesn’t extend back any further than a decade (and often much less). It’s also not globally uniform, as analysis suggests that the link between ESG scores and stock performance is more consistent in Europe than the US, in part due to the predominance of European regulation mentioned above1.
The Progeny Position
For many asset managers, like us, ESG investments are already present in our portfolios and continue to be part and parcel of a modern investment strategy. We believe the understanding along with the demand for ESG will only grow in future. We have run portfolios specifically for clients with ESG views for some time but the emergence of new funds is not only increasing the investment universe, but it allows us to add diversification, focus on costs and improve performance. We continue to develop our offering in this space.
If you would like to discuss ESG investing in more detail, please get in touch.
This article does not constitute Investment advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your Investment Manager to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested, therefore your capital is always at risk.
1 Black Rock Global Insights May 2018, ‘Sustainable investing: a ‘why not’ moment’