In recent years, investor’s motivations have shifted. No longer is the ‘Big Short’ attitude of get rich quick no matter the cost, King. Rather the content of the investments has become increasingly important. While ethical or sustainable investment attitudes aren’t necessarily a new thing, the popularity of environmental, social and governance (ESG) investing has skyrocketed, especially with fears about factors such as climate change and the Ukraine War etc
Who is an ethical investor?
Ethical investors fundamentally have another goal apart from simply just getting rich, namely trying to improve something, or provide aid with their investments. Exactly how this is put into practice depends on what your priorities are. You may have big plans, and wish to look for specific investments that you know will promote philanthropic goals and do some good in the world. For instance, maybe you want to invest in a start-up, developing ways to clean up the ocean, or a company who actively lobbies for fair wages and good working conditions for workers in their industry. You may also simply wish to make sure the stocks you are investing in aren’t doing any harm, say actively avoiding investing in tobacco or oil companies. There are a number of ways to define an ethical investor, nevertheless, it is essentially reliant on your priorities.
What is ESG investing
ESG investing refers to a specific set of criteria in regard to a company’s behaviour, that are assessed by potential investors. They are used to screen company activity to inform investors about whether that corporation aligns with their ethics and values.
- Environmental – refers to how a company treats the environment and whether it is committed to green and net-zero policies. For instance, oil and mining companies would be screened out due to this criterion.
- Social – This refers to a company’s or organisation’s treatment of its employees, customers, or local communities. This can refer to any factors from racial diversity and LGBTQ+ rights to fair pay and working conditions.
- Governance – This refers to the actual running of the company. This would include that company’s conduct, transparency, and integrity among the company’s leadership and board members.
ESG investing has exploded over the last few years, with approximately $35 trillion in assets being managed according to ESG criteria in 2020 across the five major markets: Australia and New Zealand, Europe, Canada, Japan, USA. This means that, according to the Global Sustainability Investment Alliance, about 36% of all assets in those regions conform to ESG principles.
How are funds and companies rated for their ESG values?
This is in fact a rather simple process, which is carried out by third-party specialist companies. Each of these use their own rating methods and apply a variety of different approaches and factors to reach their conclusions. This could include interviewing the management of the company, or looking at publicly available reports. This is then compiled into an overall rating. One must consider, however, that the variety of methods and conclusions reached by different companies mean these ratings aren’t always completely reliable or accurate. Many investors prefer to do their research themselves, rather than relying on third party companies.
What are the pros and cons of ESG investing?
There are a number of benefits of ESG investing, most notably the fact that you are aligning your investments with your values. You can rest assured that your financial activity won’t be financing wars and genocides, polluting the planet or better yet, will be actively working towards fighting those adversities. Furthermore, companies that align themselves with ESG values are often safer investments. This is because they are less liable to lawsuits that could arise through discrimination, environmental pollution, or workplace malpractice etc. lawsuits and class actions. This trend is simply because in maintaining good governance and environmental and social practices, companies don’t run the risk of engaging in malicious or questionable actions.
On the other hand, ESG investing can often be trickier and require professional help. It involves the pitfalls of identifying funds, avoiding greenwashing, and still trying to turn a profit. Many financial professionals may struggle, especially since ESG can mean very different things to different people. Some may simply want to remove environmentally and socially harmful companies from their portfolio, while others may wish to pinpoint specific funds that are not only adhering but even promoting the values. It isn’t a one-size-fits-all phenomenon. Furthermore, they are often more costly. ESG funds tend to charge fees of around 40 percent more than traditional investments, meaning they are significantly more expensive while not necessarily producing higher returns.
Thus, ESG investments can be a give and take depending on your goals. If you are simply looking to earn money, they may not be the most applicable route. However, if you wish to promote some good with your money, while earning as well, they may be perfect way to go. It can give you piece of mind that your money isn’t doing any harm, and promote causes that are important to you. You may wish to speak to your financial advisor if this seems a worthwhile approach.