ESG Investing
ESG investing was previously known as ‘Ethical’ investing. They had something of a mixed performance record in their early days. Critics argued that they usually only performed well in bull markets.
Those early funds typically avoided investments in companies associated with tobacco, gambling, the arms industry and so on. Now, the focus is ESG investing. Fund managers look at a company’s environmental, social and governance ratings alongside traditional investment metrics.
ESG investing collectively describes ‘Ethical’ or ‘Green’ investment strategies.
ESG investing refers to ‘Responsible Investing’.
Investing your money in this way, allows the money that you invest to have a real-world impact. ‘Climate change’ and ‘saving the planet’ are becoming more mainstream concerns. Therefore, portfolios that look to make money and aim to make the world a better place, are becoming increasingly popular.
Furthermore, once the Coronavirus pandemic is under control, Governments around the world have committed to align the rebuilding of their economies with their long-term climate change goals. Therefore, there should soon be a great deal of investment in ‘Socially responsible’ schemes. These are coming from centralised funding around the world.
What does ESG mean?
An example of what each ESG heading covers:
Environmental
- Climate Change
- Deforestation
- Plastic waste
- Pollution
- Resource depletion
Social
- Child labour
- Employee relations
- Human rights
- Modern slavery
- Working conditions
Governance
- Bribery & corruption
- Executive pay
- Board diversity
- Political lobbying & donations
- Tax affairs
- Cyber security
Impact Investing
Impact Investing increases the costs by its primary objective addressing societal and environment issues. The more detailed the fund manager’s research, the higher their charges.
Therefore, it is important to look at ‘value’ alongside the ESG criteria. This can be done by also incorporating a ‘light touch’ stock picking approach. For example, ensuring the biggest ESG offenders are avoided without sacrificing financial returns.
Furthermore, having a blend of actively managed and passive funds can also help keep running costs at a palatable level. This is a theme that we have followed when constructing our own ‘Responsible Investing’ portfolio – ‘Wealth of Choice Ethical’. Now certainly seems to be a good time to launch ‘Wealth of Choice Ethical’.
USA
First, let’s talk about the USA. The majority of global policy has been favourable for ESG. However, under Donald Trump, the United States had been at odds with the rest of the world.
On January 20th 2021, Joe Biden was sworn in as the 46th President of the United States. One of his campaign pledges was a commitment to take the US back into the Paris Climate Agreement. The country had previously left under his predecessor.
Joe Biden’s presidency is likely to turn US climate policy on its head. In addition, he made a pledge to rejoin and commit the US to a net zero emissions reduction target by 2050. This is expected to mean significant investment into green industries and technologies. Furthermore, he has already laid out a US$2 trillion clean energy and infrastructure plan.
UK
Next, the UK. The UK Government is committed to a series of green initiatives. This is including the sale of new petrol and diesel cars and vans which will be banned from 2030.
The UK’s first-ever battery ‘gigaplant’ is set to open at Blyth in the North East. The project will cost £2.7 billion.
Furthermore, it will employ 3,000 people at the plant. The plant is going to be producing lithium ion batteries for electric vehicles.
A further 5,000 jobs will be created in the supply chain.
Europe
Finally, we look at Europe. In Europe, electric car makers Tesla have plans for a huge new plant in Germany.
The EU Green Deal is at the heart of the recovery in Europe. Agreed in 2019, it is a policy framework and package that aims to transform the European economy. The overarching goal of achieving climate neutrality by 2050.
Meanwhile the European Commission has announced a recovery instrument called Next Generation EU. This is embedded within a revamped long-term EU budget.
The European Parliament and EU member states reached an agreement on the 1.8 trillion euro package. This includes a commitment that 30% will be spent on fighting climate change. That is the largest share of the largest European budget ever.
Net Zero Emissions
There has also been a slew of national commitments to net zero emissions. In total, countries or US states are representing more than one third of global greenhouse gas emissions. Moreover, close to half of global GDP have now made net zero commitments.
The Pandemic
We have all seen how companies like Netflix and Zoom have benefitted from the pandemic in the short term. On the other hand, in the longer term, we may well see a fundamental shift in investment.
This is because people are now looking at how companies have responded to the pandemic with the ‘social’ and ‘governance’ elements of ESG. Perhaps these are becoming even more important than the ‘environmental.’
Of course, the key question for investors is, do the funds perform? So far the evidence from the US – where ESG funds have a much higher profile than in the UK – is good.
Despite the last year being difficult for world stock markets, ESG funds have more than held their own, with some comfortably outperforming the main indices.
Going Forward
We are, unquestionably, going to see a greater emphasis placed on ESG investing in the years ahead.
There is clear evidence that the Millennial generation want to work for companies that share their values. As this generation become investors, they are going to want the same from their investment funds.