What is ESG investing?
ESG investing is about investing in companies that take an ethical approach to running their business and ESG criteria measures how companies or investments perform in certain categories. The table below shows the different areas that are often considered when assessing a company’s ESG performance.
Rather than simply requiring a financial return, investors are considering the ESG impact of the investments they make as another measure of success. ESG is the framework for considering these factors alongside financial factors in the investment decision-making process.
The history of ESG
ESG investing evolved from socially responsible investing (SRI). SRI dates back to the 1800s, when the Methodist Church urged its members to restrict investments in controversial companies, particularly alcohol, tobacco, weapons, and gambling companies. The term ESG was used in 2004 by former UN Secretary-General Kofi Annan and ESG issues were first mentioned in the 2006 United Nation’s Principles for Responsible Investment (PRI).
Why is it important?
ESG is important because it provides impetus for companies to act in a socially responsible and sustainable way for the good of the planet and its inhabitants. Without this focus, it is all to easy for poor practices to result in harm or threat of harm to the environment, animals and people. There is increasing pressure from governments, investors and consumers for companies to adopt ESG practices and recent legislation such as the ESDR (European Sustainable Disclosure Regulation, 2021) which imposes mandatory ESG disclosure obligations for asset managers and other financial markets participants and the EU Sustainable Finance Action Plan, a policy promoting sustainable investment across Europe, parts of which were effective from March 2021. The aim is to redirect investment away from sectors contributing to climate change, such as fossil fuels and towards sustainable sectors.
Choosing ESG investments
For investors wondering whether ESG investing offers favourable returns, the answer is encouraging. The Morgan Stanley Institute for Sustainable Investing compared the performance of sustainable funds with traditional funds and found that from 2004 to 2018, the total returns of sustainable mutual and exchange-traded funds were similar to those of traditional funds. Other studies have found that ESG investments can outperform conventional ones. In addition to high returns, ESG investing may offer low risks. The same Morgan Stanley study found that during turbulent markets, such as in 2008, 2009, 2015 and 2018, traditional funds had had a higher potential for loss than sustainable funds.
What’s next for ESG?
In June, more than 450 investors with over $41 trillion in assets signed a statement urging governments to strengthen climate change policies ahead of COP26 which takes place in Glasgow in November. For investors to support businesses that are serious about reducing their carbon footprint and creating sustainable economies, they need reliable data to differentiate between lip service and real impact. A key obstacle facing investors is the lack of meaningful and comparable data, based on a global standard for corporate ESG reporting. It’s possible that COP26 could take ESG investing to the next level and implement a global ESG reporting standard for investors.
Advice from Blacktower Financial Management
ESG factors form an important consideration when providing financial advice. Our wealth management service provides a dedicated advisor that can assist you when planning your financial strategy and choosing your investments. We’ll work in partnership with you to identify the most appropriate investments that align with your values and beliefs to meet your investing goals. Contact one of the representatives at our Algarve office today for your free no-obligation discussion.
Blacktower in Portugal
Blacktower’s offices in Portugal can help you manage your wealth to your best advantage. For more information contact your local office.
Manuela Robinson is the Associate Director of Blacktower in the Algarve, Portugal, with offices in Quinta do Lago and Cascais.
Blacktower Financial Management has been providing expert, localised, wealth management advice in Portugal for the last 20 years. We can help with specialist, independent advice on securing your financial future. Get in touch with us on (+351) 289 355 685 or email us at firstname.lastname@example.org.