At Suttons our Advisers are excited about Environmental, Social and Corporate Governance (ESG) investing and Ethical investing. Both are becoming mainstream strategies as more people are becoming aware and interested in this type of investment. A quick overview on ESG and Ethical Investment follows:
ESG describes three factors used by fund managers to assess corporate behaviour:
This focuses on interaction with the physical environment, such as climate change, carbon emissions, air and water pollution and so on.
This looks at the impact on society and communities, including human rights, health and safety issues, privacy and data security.
This focuses on how companies are governed, including diversity, transparency, ownership, ethics.
Fund managers use information to obtain a picture of the potential future financial performance of companies they are considering investing in. The belief is that companies that don’t impact the environment, have a social conscience and are well governed, will out-perform other companies.
Fund managers looking to improve returns will assess a company’s responses to ESG issues and decide whether to invest.
Ethical investing is about investing using ethical principles as a guideline. Often, it means filtering out certain types of companies and sectors – usually weapons manufacturers, tobacco producers and companies involved in animal testing for example.
This type of investing depends on the investor’s views. It gives investors the opportunity to channel their money into companies whose practices and values match their personal beliefs, whether these are environmental, political or religious.
Another aspect of ethical investment to be aware of is that investors may not necessarily be choosing a company based on its investment performance. For example, a nuclear company may be a sound financial investment, but is ruled out because of the investor’s stance on nuclear power. That’s not to say ethical investors will put money in a poorly performing investment, but they may rule out certain strong financial performers because they don’t fit their ethical preferences.
Are ESG and Ethical funds higher risk?
In the early days of Responsible Investing, fund managers and investors considered it risky to invest in these types of funds or investments, however this is no longer the case. With a wider range of stocks available to ESG and ethical investors, they can now easily spread the risk to their money, just as with traditional investing. The old misconception that investing in ideals that matter to you personally will mean sacrificing returns, is no longer credible.
Events in our natural world and in our economy show us environmental and social issues can impact directly on the performance of companies. Having a responsible investment approach is about ensuring you are minimising your exposure to the financial risks increasingly associated with climate change, changing energy needs, poor ethical and governance practices and so on.
In the future it’s likely those companies that fail to manage their environmental and social risks will perform poorly. Those that pay close attention to these issues and are committed to sustainability will be able to tap into investment opportunities.
At Suttons our Investment Committee have now included a full risk rated range of Responsible Portfolios to support clients that wish to integrate a responsible focus into their investment strategy. We have found that some of these portfolios have outperformed their conventional rivals over the past year. With the impact of the pandemic over the last year, we have seen an accelerated focus on Responsible investment as a whole, as cultural views are changing and more focus is on social issues and pressure is being applied to corporations and governments to reform.
Please contact us if you wish to discuss Responsible Investment in your portfolio or your investment arrangements in general.
Lisa Davies DipFA AwPetr
Independent Financial Adviser