ESG investing, which typically assesses the factors listed below, offers a way for the public to invest
in funds that consider environmental, social, and governance issues. Whilst ESG is recognised as the
collective name for these types of funds they are also known by terms such as "socially responsible
investing (SRI)" and "sustainable investing." So, what exactly does each of the areas covered within
the term ESG stand for?
Conservation & protection of the natural environment
Air emissions and air quality.
Energy use and conservation.
Natural resources and land use.
Waste management and water quality.
Hazardous materials use.
Relationships with employees, suppliers, clients & communities
Labour standards and employee relations.
Production quality and safety.
Local community impact.
Equal employment opportunities.
Health care, education, and housing services.
Standards for company leadership, risk controls & shareholder rights
Ethical business practices.
Board independence and diversity.
Executive pay vs. employee pay.
Account and tax transparency.
At the heart of ESG investing is the simple idea that companies are more likely to succeed and
deliver strong returns 1 if they create value for all their stakeholders – employees, customers,
suppliers and wider society including the environment – and not just the company owners.
Consequently, ESG analysis considers how companies serve society and how this impacts their
current and future performance. ESG analysis is not just about what the company is doing today.
Consideration of future trends is critically important and should inherently include disruptive change
that can have significant implications for a company’s future profitability or its very existence.
By 2025, the so-called 'values-driven generation' – millennials – will represent three-quarters of the
global workforce. 1 A Morgan Stanley study found that millennials are twice as likely as the general
population to invest in companies with social or environmental goals. 2 And in North America alone
this generation, alongside Generation X, is set to share a wealth transfer in the region of $30 trillion
from their baby boomer predecessors in coming years.
The pressure from asset owners to invest responsibly and have a more sustainable mindset
therefore expected to grow significantly. Millennials are more concerned than previous generations
about putting their money into investments that are not sustainable and not harmful to the Planet;
so says Terry Smith, founder of asset management company, Fundsmith. This conclusion has been
backed up by research from Morgan Stanley, which found that 82% of high-net-worth millennials
express an interest in ESG Investing compared with 45% of all high-net-worth individuals.
There is the additional factor of the retail investor facing up to sustainability challenges and
strategically allocating their savings to companies and funds that can help make good long-term
improvements in the World in which we live.
The world faces major sustainability challenges – such as climate change, ageing population, and
inequality – which require radical solutions that will bring huge yet hard to predict changes to the
global financial system. By facing up to these challenges, recognising that capital allocation decisions
have a real impact on the world, and holding bold visions of the future, investors can hope to make
good long-term investment decisions.
Without as doubt, one of the consequences of the Pandemic on the investment landscape is that the
more astute investor has become more aware of the volatility that can occur in traditional markets
because of geo-national lockdowns. The supply and demand of products and services change very
rapidly when vast swathes of the world’s population are prevented from going about their normal
lifestyles. In Ireland, for example, the total shut down of the Construction Industry has led to a steep
fall-off in the number of completed new builds in 2020 and 2021. Perversely, this has led to
corresponding increase in house prices as the demand for housing has outstripped the supply,
particularly in the first-time buyer sector.
As restrictions ease, the increasing evidence is that people looking to invest their hard-earned
income and savings into pensions and investment funds generally, will look more diligently on where
their money is being invested. Companies and countries that are viewed as behaving badly or
potentially contributing to further interruptions of our lifestyles are likely to be regarded negatively,
especially by the younger “millennial” investors entering the marketplace for the first time. ESG
Funds represent a clear opportunity for this more discerning individual.
While some businesses across the World are in Covid-19 turmoil a recently published research note
produced by HSBC Bank suggests that companies with strong ESG credentials are proving more
resilient than their peers.
The big question for investors is whether ESG Investing means having to accept lower rates of return
than more traditional investment strategies. Tobacco, Alcohol, Weapons companies have,
historically, generated consistently good returns for investors and Fund Managers so what will the
implications be for excluding them from your ESG compliant portfolio? Well, over the past 5 years
the FTSE 4Good UK Index has returned 60.31% against the FTSE 100’s 50.85%.
This Index measures the performance of companies demonstrating strong ESG practices and those included in the Index need to show they are working towards improved environmental management, climate change
mitigation and adaption, countering bribery, upholding human and labour rights and improving
supply-chain and work standards.
Meanwhile, in the US, the KLD400, the main ethical Index, returned 109.9% relative to 107.65% for
the more mainstream S&P 500. So, over the past 5 years companies with strong ESG credentials
have faired better in both the UK and the US stock markets.
Linked Financial are making a commitment to actively promote ESG Funding as a viable alternative
for all our clients over the more traditional funding options. We will take you through our rigorous
and interactive Risk Profiling and Fact-Finding process and then recommend ESG Funds which are
available in the Irish marketplace and which match your personal preferences.
Talk to us today at www.linkedfinancial.ie or contact me, personally, for an initial consultation at
Sources: 1. Big demands and high expectations, The Deloitte Millennial Survey, 2014. 2. Sustainable Signals. New Data from the Individual Investor, Morgan Stanley Institute for Sustainable 3. ”The Greater Wealth Transfer”, Accenture, 2012.