What is ESG?
Important Note: This is not personal advice. If you are not sure whether an investment is right for you please seek advice. If you choose to invest, the value of the investment will rise and fall, so you could get back less than you put in.
A growing number of investors have started to incorporate their values and concerns into their selection of investments instead of simply investing for potential profitability. These ‘socially responsible investors’ use Environment, Social, and Governance factors to integrate into their investment process to decide what equities or bonds to buy.
Environmental
The environmental factors include the contribution a company makes toward climate change, waste management, and energy efficiency. Companies managing these environmental factors better will score a better perception as a company doing their part in combating global warming, cutting emissions, and decarbonising.
Social
A company’s social factors include a wide variety of factors such as human rights, labour standards in the supply chain, exposure to illegal child labour, diversity, and workplace health and safety. One main factor investors may consider is how the company’s relationship is with its employees.
Governance
Governance is essentially about how a company is managed by the top executives and the board of directors tending to the company’s various stakeholders such as employees, suppliers, shareholders, and customers. Financial transparency is considered a key element of good corporate governance. Board members, such as a diverse and inclusive group, are considered and whether they favour multi-million-pound bonuses while the company imposes salary freezes for all other employees.
Are ESG Investments Good?
Investors will have their investment strategy, interests, and values that will sway them towards certain equities. ESG equities are great for investors who like to invest in companies that reflect their values. ESG will narrow down the number of companies you can invest in due to the strict criteria for companies to fall under ESG. One way to invest in ESG companies is by investing in funds or ETF’s that invest in ESG companies. By doing this you diversify your investment portfolio according to your values. As climate change and sustainable living continue to be an important part to build a sustainable environment for future generations, ESG popularity will increase as well. A record $649 billion were poured into ESG focused funds worldwide in 2021 which is up from $542 billion and $285 billion in 2020 and 2019 respectively. The increase in ESG investments shows there is a huge appetite from investors to invest in companies that consider environmental, social, and governance values.