ESG Investing - A trend or here to stay?
Money vs Morals – is it really a choice?
Traditionally, ethics and investing have not always gone hand in hand. With a lot of companies conducting poor social practices in the name of stakeholder capitalism, investors wanting to fuel wealth and achieve investment objectives were put in a predicament; either sell your soul to the devil or you do not fit in the investment world.
For decades, this approach has been upheld because investors enjoyed high returns. However, modern investors are increasingly realising the basic fact that they also have non-profit related stakes in the invested companies. This change in mindset has been brought about by socially conscious investors being more vocal, demanding companies factor in for ESG concerns. A changing demographic combined with increased awareness of sustainability, backed by stricter regulation, has caused a tremendous rise in ESG investing. With today’s generation consistently leaning towards social responsibility, be it in the goods they buy, the companies they work for and now even in their investment portfolios; businesses are reshaping how they are operated, including implementing ESG based norms and practices. With most ‘baby boomers’ in a position to pass down inheritance to younger generations, who are more vocal of their ESG preferences, it definitely looks like the ‘phenomenon’ is here to stay.
More so, in the wake of the pandemic, ESG investing has gone on an overdrive from under $500billion in 2013 to $750 billion in 2018 and is predicted to be 1.8 trillion in 2028. Earlier, people were cynical in thinking ESG was a phenomenon well placed for a ‘bull’ market and most investors will resort back to sovereign bonds on the threat of a looming recession. However, coronavirus has proved to be a stress test for ESG and despite the COVID-induced stock sell-off period in early 2020, ESG funds outperformed expectations with some even terming it as the ‘new safe haven’. With every economy looking for a ‘greener’ return after the pandemic, ESG is becoming a mainstream criterion for financial markets looking for growth opportunities. However, along with its many attributes ESG investing has also brought about more jargon and noise in the investment industry. With a lack of clarity on terminology, ambitious guidelines on what really even counts as ‘green’ many investors tend to retract and resort to the comfort of ‘traditional’ investment methods. So, what is ESG Investing? And how ‘ethical’ do you really need to be?
Simply put, when one invests money, it ends up being temporarily used by a company/government, to fund their pursuits. But some of these interests may not match the investors’ own values. However, in all cases, it is not possible to gain reassurance that the money is invested according to their own values. Through ESG investing, in combination with traditional stock analysis techniques, environmental, social and governance factors of the companies are integrated into the criterion for choosing stocks.
Now, the term ‘ethical’ is fairly broad, it means apart from wanting higher returns, the investor basically wants to do some good or in some cases cause no harm. While one investor may want to avoid industries known to cause harm, such as tobacco, stricter investors may look to invest in companies with particularly high standards with regard to its main activities and how they impact the world. Moreover, in many cases, certain companies committed to sustainable activity may not always obtain the highest profits and in the short term and may lag behind more ‘ruthless’ companies. That being said, ESG investing does not necessarily mean compromising on returns. Indeed, in the long term, the opposite may occur. ESG funds generally target profitable companies with high ESG credentials, rather than simply investing in anything with good corporate responsibility. ESG investing is more than just a case of satisfying one’s morality. In reality, companies with a strong ESG profile may represent better value as sustainable companies have greater prospects if considering a smarter, more long-term move.
However, it is imperative to note, not every company focuses on all the ESG factors and is able to incorporate every factor in their operations. Some may manage their production waste in an environmentally conscious way, thus having high environmental ratings, but in the same vein have underpaid employees. Thus, it is up to an individual investor to decide which matters most to them and pick investments accordingly. For example, if one is passionate about the anyone sustainability of the environment, they can invest in a climate change fund. If social issues are what you feel strongly for then you can invest in companies that are vocal about inclusivity, diversity, and the welfare of their employees. Moreover, even if you do not have a preference or bias towards any one factor, it does not mean ESG investing is not for you.
The whole notion behind ESG investing is a simple one. When we invest, we look to secure our futures and through responsible investing we are not just focused on the future monetary value of stocks but also a healthy world for generations. Due to the holistic approach of ESG towards investing, investors are able to fulfil their investment goals and leave a more sustainable footprint on the earth. Thus, even if you do not have a clear ESG goal at the back of your mind, your approach can be rather to pick a decent portfolio that is not destroying the world. With a fundamental shift underway in society, recycling the plastic you consume cannot be the only contribution. It is where one puts money as investors that influences and drives a positive change in the real-world outcomes. Your portfolio is basically your vision of the future world and through your capital, you are able to shape that future.
With, ever-rising demand, a growing number of investment platforms are offering different versions of ESG funds. However, picking through these ESG funds is a process one has to be careful with and conduct strict due diligence, especially with increasing numbers of companies advertising themselves as ‘green’. Any information online may be inaccurate, biased and reflect the vested interests of providers. This is where your financial adviser comes in. At Strategic Solutions, we are independent, unbiased, and experienced in identifying funds and comparing them objectively. We understand your goals and know what to look for and what risks to be aware of when it comes to achieving them. By having an honest and open conversation with your adviser you are able to convey and look to fulfil not just your investment goals but also your vision of the future world. If you want to find out more about positioning your investment objectives in line with your personal beliefs, or simply want to have a discussion, drop us a line at email@example.com. We are more than happy to help.