ESG driven investing is becoming more important to many investors. But what is it? And will it affect investment performance? Ed Read-Cutting offers an insight into ESG investments.
Environmental, social and governance (ESG) refers to three central factors in measuring the sustainability and ethical impact of an investment in a company or business. It’s a term that is interchangeable with Sustainable, or Socially Responsible Investing (SRI), and mostly simply relates to identifying and engaging with companies that have the ability and willingness to improve ESGrelated business practices when making investment decisions. ESG investing originated in the 1960s when investors began avoiding companies because of their links with tobacco production or the South African apartheid regime. Today, the practice is rapidly evolving and it’s clear the world cares. Growing concerns about the state of the planet were seen at the climate rallies in London earlier this year.
It’s also been suggested that millennials – as well as women – are asking more of their investments. We have certainly seen an increase in clients questioning the sustainable and ethical credentials of their investments. Policy makers are also starting to take this issue seriously with the EU taking steps to investigate sustainable finance and its impact on the economy.
Does investing with a moral purpose lead to reasonable investment returns?
Historically, ethical investing did not lead to returns which outperformed other, more traditional, investment methods. Yet recent studies suggest that companies with robust ESG practices display a lower cost of capital, lower volatility, and fewer instances of bribery, corruption and fraud. In 2016 Barclays reported “that a positive ESG tilt resulted in a small but steady performance advantage”. The Wall Street Journal has also reported that “companies with high eco-efficiency – that generate the least waste relative to the value of their products and services – outperformed.”
Food for thought
Global challenges such as climate change, rising sea levels, privacy, data security and regulatory pressures are creating new investment risk factors. With companies needing to consider these impacts, and their own corporate social responsibility, investors are beginning to re-evaluate how they make a decision on their investments. Ultimately ESG investing can add a fresh value metric to your portfolio.
It’s important to remember that the value generated is not just about returns; the ‘reach’ goes far further. Have you considered how your investments reflect your ethics, values and beliefs? To discuss your portfolio please get in touch.
Ed Read Cutting, Director
The Fry Group, Belgium