ESG Investing

A Change in Momentum

In recent years, more and more clients have expressed concerns about the impact their investments have on the world around us, especially with the hit of the recent COVID-19 pandemic.

 

What Next?

While accepting their need for a return on their investments in order to provide for themselves, they often have other objectives in that:

  • They do not want to feel they are adding to the damage done.
  • They would like to see others benefiting in some way from their investments.

The pandemic has brought a welcome positive interest in our world – from an appreciation for cleaner air, to increased admiration for frontline workers. It could also prove a major turning point in the way many look to invest, altering not only society’s values, but also our moral responsibilities. The demand to “do something good” becomes an important factor we shouldn’t ignore.

Therefore, a focus on the companies that we invest in is likely to become more predominant. Something that lends itself well to these values is ESG (Environmental, Social, Governance), a coined phrase used to evaluate the behaviour of companies, as well as determining their future financial performance. The ESG factors explore the ethical, social and corporate governance values companies hold. 

These categories can be covered in the following ways:

Environmental Factors

• Climate change policies, plans, and disclosures.
• Greenhouse gas emissions goals, and transparency into how the company is meeting those goals.
• Carbon footprint and carbon intensity (pollution and emissions).
• Water-related issues and goals, such as usage, conservation, overfishing, and waste disposal.
• Usage of renewable energy including wind and solar.
• Recycling and safe disposal practices.
• Green products, technologies, and infrastructure.
• Environmental benefits for employees such as cycling programs and environmental-based incentives.

Social Factors

• Employee treatment, pay, benefits, and perks.
• Employee engagement and staff turnover.
• Employee safety policies including sexual harassment prevention.
• Diversity and inclusion in hiring and in awarding advancement opportunities and raises.
• Ethical supply chain sourcing, such as conflict-free minerals and responsibly sourced food and coffee.
• Consumer friendliness, customer service responsiveness, and history of consumer protection issues including lawsuits, recalls, and regulatory penalties.
• Public stance on social justice issues, as well as lobbying efforts.

Governance Factors

• Executive compensation, bonuses, and perks.
• Diversity of the board of directors and management team.
• Majority vs. plurality voting for directors.
• Dual- or multiple-class stock structures.
• Transparency in communicating with shareholders, and history of lawsuits brought by shareholders.
• Relationship and history with regulatory bodies.

Companies are starting to make a stand in ensuring they invest in those making a positive contribution towards making the world cleaner, healthier and safer. Investing in well run companies is always a sound principle and investing in developing markets could be seen to offer more opportunities for growth than older, established (and potentially declining) industries.

As an example, the COVID-19 pandemic has shown the resilience of technology and healthcare companies, as well as promoted the sustainable power providers. In 2020, more electricity has been generated in the UK by renewables than by all fossil fuels and, as of June 2020, no coal fired electricity has been used for over 60 days*; renewables have simply generated enough to cope with the reduced demand. As an investor, contributing to a renewable generator seems far more sensible than coal or gas. However, it is not perfect. For example, the use of American exported wood pellets for electricity, often seen as a renewable source, but not always perceived as green.

ESG investing is likely to become a future discussion point with clients with the demand for this type of investing is very much on the rise.

 

We are finding that many of our clients want to include ESG investments for at least some of their portfolio, to ensure that all are investing not only in line with their “moral compass”, but also maximising potential returns. We are more than happy to research and discuss available options.

*source : edie website

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