What is Responsible Investing and Why does it Matter? ESG Funds and More
Introduction
When you think about what is important to you when it comes to your money, what comes to mind? Security? Stability? Growth? While those are all valid concerns, there's another factor that you might be considering: responsibility. Responsible investing means taking into account environmental, social and governance (ESG) factors when making investment decisions. As the importance of climate related investments has risen dramatically over the past few years, ESG investing has become popularised, not least because a new generation of investors is now participating in the market with different demands from their predecessors. In this blog post, we'll discuss what responsible investing is, why it matters and how you can get involved.
What is responsible investing and what are the key factors to consider when making investment decisions
When it comes to responsible investing, there are three main pillars that you should take into account: environmental, social and governance (ESG) factors. Environmental considerations might include things like a company's carbon footprint or its water usage. Social factors could encompass a company's treatment of employees or its involvement in human rights violations. Governance factors would relate to a company's board structure or its executive pay practices.
As an investor, you can choose to invest in companies that are leading the way when it comes to ESG considerations or those who are lagging behind but have pledged to make improvements. There are a number of different ways to measure a company's ESG performance, but one popular method is through an environmental, social and governance (ESG) rating. These ratings are provided by specialist research firms and can be used to compare the ESG performance of different companies. While this research can often be private, platforms like Morning Star collect this data into ratings that they make available to consumers for free. Now, bear in mind that this is certainly not comprehensive, and often comprises a summary of information made available in filings that are made public. Listed companies are required by law to make certain disclosures in their annual results, and digging through these can yield some interesting insights into a company's "greenness." Carbon footprint is just one of them, although perhaps the most easily quantifiable and comparable.
One other rubric for comparing ESG impact is the UN's Sustainable Development Goals. These are 17 goals that were adopted by all UN member states in 2015 with the aim of achieving a more sustainable future for all. The goals cover a wide range of topics, from poverty and hunger to gender equality and climate action. While not every company will be aligned with all of the Sustainable Development Goals, it can be informative to see which ones a company is supporting. Use this as more of a general framework or checklist rather than a specific comparison measure. For example, it's difficult to say which has more social impact: a healthcare company working on a cure for degenerative disease, or a green energy company working on replacing non-renewable energy sources.
Why does responsible investing matter and what are some of the benefits of ESG funds
There are a number of reasons why responsible investing matters. For one, it can help to create a more sustainable and just world. By investing in companies that are leading the way on environmental and social issues, you can help to drive change and encourage other companies to follow suit. Additionally, research has shown that ESG factors can have a positive impact on financial performance. A study by MSCI found that companies with strong ESG ratings outperformed those with weak ratings by 11.62% over a five-year period. Of course, this is a somewhat cherry-picking of data but it is undeniable that as future consumers demand better from the companies they buy from, demand will surge for those at the forefront of social impact measures.
How can you get involved in responsible investing, including information on ESG funds
There are a number of ways to get involved in responsible investing. One option is to invest in an environmental, social and governance (ESG) fund. These funds invest in companies that are leading the way on ESG considerations and can offer a number of benefits, including the potential for outperformance and a lower carbon footprint. However, debate rages as to whether many of the companies included deserve their place, which is especially pertinent given the level of leeway there is.
If you're looking for somewhere to start, there are a number of platforms specifically designed to give consumers both information and access to impact investing. Here are a few we like:
One of the longest standing impact investing platforms, Circa 5000 have both an app and create custom thematic portfolios based on your preferences, so you can weight your investment decisions based on which factors are most important to you. They pre-screen investments to (hopefully) benefit from structural market trends too, so you can feel relatively safe in the knowledge that you're choosing from a select few opportunities.
Annual fee: 0.5%
GreenGrowth is unique in that it measures individual users' carbon footprints and allocates them into corresponding environmentally-themed funds, weighting them more heavily into the areas in which they are most polluting. Users are also able to self-select to make this process more bespoke. Their fees are reasonable and their ISA product is the pick of the bunch.
Annual fee: 0.6%
Clim8 exclusively selects companies or funds that are tackling the climate crisis. They split these into six climate-friendly "megatrends": Circular Economy, Sustainable Food, Water Systems, Green Energy, Clean Mobility, and Climate Tech.
Annual fee: 0.6%
This one is slightly more expensive, for the simple fact that investments are actively managed rather than passively through ETFs. This means however that there is more likelihood that the money is being invested with pure impact in mind, and can be tailored in a more bespoke fashion to do so. Of course, that means that it comes at a premium.
Annual fee: 0.99%
Another option is to consider responsible investing when making your own investment decisions. When you're researching a company, take some time to look into its ESG rating (available on most research platforms). This will give you an indication of how well it is doing on social and environmental measures. Additionally, many companies are now reporting their carbon footprints, so this is another area you can assess. If a company is not meeting your standards in these areas, it might be worth reconsidering your investment.
All the major brokerages now list impact funds so you can invest thematically here based on what you're most concerned about. However, proceed with caution. It's difficult enough to pick investments when performance is your only concern, let alone when you start to factor in other variables. Inexperienced investors are probably better off going with either a well revered impact fund, or using a platform like one of the above that pre-screen their offerings.
Greenwashing
Finally, a word on greenwashing. This is the practice of over-reporting or misrepresenting the social impact of your company in order to make it seem as if you are having significant positive social impact. This has become increasingly prevalent since the rise in demand for impact investing opportunities, and the closing of the proverbial net as requirements on companies' social impact status becomes more onerous.
Wrapping Up
So there you have it. Given that it's such a hot area, there is a wealth of both information and opportunity for those looking to redirect their capital into more impactful investments. Contrary to popular rhetoric, it is now becoming clear that it is possible to combine profit with purpose, although it is incredibly important to be clear about what that purpose looks like in the near and long term, how you are measuring or checking it off, and what concessions (if any) you are prepared to make in the short term on returns as companies gradually change their practices, often at a glacial pace. We are certainly planning to allow users to track the social impact of their portfolios on our platform, whether this uses third party rating mechanisms or our own. For further updates, sign up at the foot of this page.
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