Your Guide to ESG Investing
ESG investing is where you take into consideration a company’s environmental, social and governance stance when deciding where to put your money. In this article we cover what ESG is, why it matters and how investments can meet certain ESG criteria.
What is ESG investing?
For some, ‘ESG investing’ has become synonymous with ethical or socially responsible investing. While similar, ESG investing focuses more strictly on what a company thinks about and engages with Environmental, Social and Governance issues.
Environmental: What impact does the company have on the environment? For example, does it contribute to the climate crisis, or take a step to help tackle it. What is its approach to waste, water, or pollution?
Social: What are the company’s employment practices and supply chain like? What is its approach to human rights? What are the conditions in its factories?
Governance: How is the company run? Is there a diverse mix of staff in senior management positions? Is executive pay extraordinarily high? Does it pay its tax?
Although there are many ESG guidelines and ratings from various bodies, there is no universal ESG standard as yet, hence ESG means different things to different people. It is often interchanged with other blanket terms such as ‘ethical’ and ‘sustainable’ investing.
» MORE: NerdWallet’s investing guide
How do we measure ESG?
One issue with ESG is that it is still largely based on subjective decisions.
There are many ESG ratings agencies providing frameworks, scores and standards – including companies such as Sustainalytics, MSCI, and the CDP – but there are growing calls for a global standard to make it easier to compare. Each ratings company has a different framework for how it scores ESG, and not all companies have been rated by them. Ratings are a good indicator of how a company fairs on ESG issues, but it is still worth doing your own research, as your idea of what good ESG is could be different to theirs. The UN’s 17 Sustainable Development Goals is a list that some people use as a benchmark.
When doing your own research, a good starting point is to look at the fund factsheet (if you are putting your money with a manager) to see which companies they are invested in. You can then look under the bonnet to scrutinise each holding more thoroughly by analysing each company's specific approach to E, S and G.
One pitfall to watch out for is so-called “greenwashing,” where companies and funds claim to meet ESG targets but are not what you would really consider as doing enough or meeting your own ethical standards.
Why does ESG matter?
You may invest in the hope of growing your money over the long term. You may want to put your money into companies that will stand the test of time and adapt to our changing futures.
For the everyday investor, there has been more awareness of these issues in recent years and the desire to ‘do the right thing’ when investing by choosing companies that align with their values. There is also an increasing belief that following stricter guidelines and scoring higher on ESG can help improve financial returns.
If you are investing for the medium to long term, as is sensible, you will want to put your money into companies that are likely to thrive. Arguably those are the ones finding solutions to our most pressing modern problems, for instance, by working towards cleaner energy, and shunning practices that will be legislated against, such as modern slavery.
There is also the argument that companies that score higher for ESG factors are likely to be better run and more able to withstand crises.
» MORE: Ethical Money Solutions
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.
Image Source: Getty Images
Laura is a journalist and author, writing about money since 2008. Including writing for The Times for 9 years. She believes finance doesn't need to be complicated. Author of Money: a user's guide. Read more