Learn why ESG (environmental, social, and governance) investing is here to stay
In an environment of contracting markets, ‘ESG’, or ‘environmental, social and governance’ investing continues to be an area of growth and focus for asset managers, financial advisers and investors, alike.
What all this means for the investment industry is that its participants can no longer afford to view ESG investing as a ‘subset’ or niche area for just an interested few. With new regulations on the horizon, fund groups and advisers will soon be obligated to consider various ESG factors within their propositions and, as investor demand increases, think carefully about how their propositions can attract and retain socially conscious investors.
The ESG world is a complex and fast-moving one.
Our white paper examines:
- What is 'ESG' investing really?
- A brief history of ESG investing
- ESG Regulations
- ESG Ratings
- Risk & Return
- Potential criticisms
- The future of ESG investing
WHAT IS ‘ESG’ INVESTING?
The term ‘ESG’ has largely become the accepted phrase within the industry. A useful, if deceptive, abbreviation, it has become the catch-all term to group together a range of moral, social, ethical or environmental factors which ultimately govern an investor’s decisions. In this context it is accepted that ‘E’ stands for ‘environmental’, ‘S’ stands for social and ‘G’ stands for ‘governance’.
The three individual components cover huge and sometimes conflicting areas of the industry as a whole and in some cases other terms are used interchangeably. These include phrases such as ‘responsible investing’, ‘ethical investing’, ‘investing for good’, ‘impact investing’ or ‘social investing’ among others. Essentially they all cover the same premise, in that a fund or portfolio will invest its assets in a certain area, or, as is more likely the case, avoid certain ‘sin’ stocks or industries which adopt practices with which an investor may disagree (for example, “unnecessary” animal testing).
The ‘E’ in ESG investing, covers investments that largely focus on stocks that promote sustainability, green or renewable energy, or environmentally friendly infrastructure projects. Additionally, they will seek to actively avoid fossil fuels and industries such as mining. Perhaps the term that is the easiest to be understood, environmental, climate-related or green investments tend to dominate consumer thinking when it comes to ESG investing. It also covers sustainable business practices in any sector of the economy and choosing to invest in these companies ahead of those with unsustainable alternatives.
The ‘S’ in ESG, ‘social’, is perhaps the most difficult to define and, more importantly, to quantify. While the environment is an easy concept to understand, ‘social’ issues cover a wide range of topics. They could include (but are not limited to) anything from companies with a strong commitment to diversity in the workplace, to transparent working procedures, working to ensure an ethical supply chain, or investment in social enterprises, or a strong focus on corporate social responsibility (CSR) initiatives. Some have also interpreted it to mean challenging the traditional premise of choosing an investment based on maximising returns. Social investing is sometimes understood to inverse this relationship so that returns become a secondary aim in the overarching investment objective.
The ‘G’ in ESG stands for ‘governance’ and largely concentrates on how an organisation is managed from the top down and the decisions it takes at a managerial level. It concerns itself with the make-up and decision-making among the board, executive team, shareholders, managers and the culture embedded within a company and includes areas such as remuneration policies and executive incentives. Governance is already enshrined in regulatory and legal frameworks for both private and publicly listed enterprises across the world.
WHAT IS ‘ESG’ INVESTING REALLY?
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