We are reading more and more in the media about changes to the world we live in and ESG is a relatively new investment theme. Governments and Companies are having to take notice of these changes and policy is starting to dictate the way we live. For instance, Global leaders are committed to becoming carbon neutral within the next 30 years. According to research by the Society of Pension Professionals (SPP), following recent legislative changes, there appears to be more interest coming from the employer’s workplace pension investment community for ESG funds. So much so, more investment management houses are adding ESG influences to their investment selection process.
So, what is an ESG Investment?
In simple terms it refers to Environmental, Social and Governance issues that an investor could consider when making an investment. It is also known as “Sustainable Investing”.
For instance, ESG issues could be
- Environmental risks created by business activities that have the potential for negative impact on air, land, water, ecosystems and human health. Climate change is now universally understood and (almost) universally acknowledged. Forward-thinking companies are considering ESG factors such as preventing pollution, reducing emissions and climate impact. Perhaps reducing environmental liabilities by lowering costs, could lead to increasing profitability and reducing the impact of regulatory (litigation) risk, as well as reputational risk.
- Social risk refers to the impact that companies can have on society. A happy workforce is better than a disruptive workforce. Not rewarding staff properly creates unwanted headlines for companies in trouble. Employers who listen to their employees create a culture that people want to work in. Happy employees will tell their family and friends about their employer and this creates positive brand awareness.
- Governance risk concerns the way companies are run. It addresses areas such as corporate brand independence and corporate risk management. For instance, since the 2008 financial crisis, improving corporate governance is increasingly a goal for regulators. In other words, you would not want to invest in a badly run company.
Many investors are not only interested in the financial outcomes of investments. They are becoming more interested in the impact of their investments and the role these assets can have, in promoting global issues such as climate action as well as investing in funds that can address their objectives.
As I stated at the beginning, ESG is relative new investment theme but one to be considered, but it is advisable to take advice on this type of investment. Using the services of a Financial Planner such as Richmond House can help you to identify your objectives and, provide strategies that will help towards your investment outcomes.
I wish you happy and prosperous New Year.
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. Investments may fall as well as rise and you may not get back the full amount
Nigel Taylor Cert PFS, Dip FA