The news was dominated recently by the meeting of the COP26 in Glasgow and the environmental issues which affect the planet and our daily life. It came at a time when many of us were already thinking about what changes we can make to play our part in improving the situation. The theme of “ESG investing” – Environmental, Social, Governance – has been highlighted during the fortnight and is something that many investors wish to explore.
The “26th Conference of the Parties” in November was a United Nations global summit on climate change and how countries can tackle it. Large companies must also play their part in reducing their impact on the environment, and this is where investors can be selective about which companies to buy stocks in.
Interest in ESG investments has grown in recent years. Investors are putting more emphasis on the environmental and social impact of their investments, wanting to ensure that companies benefiting from their capital do not contribute to issues like climate change, inequality, etc. They increasingly seek to manage exposure to ESG factors, while generating long-term sustainable returns – responsible investing and performance can complement each other.
This type of responsible investment prioritizes financial returns alongside a company’s impact on the environment, its stakeholders and society. Here are some simple definitions:
Environment – The impact of a company’s activities on the environment: carbon footprint, greenhouse gas emissions, use of renewable energies, sustainable supply chains, etc.
Social – The impact of a business on its employees, customers, consumers, suppliers and the local community: the way employees are treated, racial diversity, LGBTQ + equality, inclusion programs, etc. Positive outcomes include improving health, productivity and morale, or reducing negative outcomes such as high turnover and absenteeism.
Governance – The way companies operate: how does management lead positive changes? What are their business ethics? Positive results include aligning the interests of shareholders and management, improving diversity and accountability, and avoiding unpleasant financial surprises such as excessive executive compensation.
In summary, ESG investing takes into account how a company serves its people, communities, customers, stakeholders and the environment.
Nowadays, most public companies and many private companies are assessed and rated on their ESG performance by various third party reporting and rating providers. These include Bloomberg, the S&P Dow Jones and MSCI indices.
Institutional investors, asset managers, financial institutions and other stakeholders increasingly rely on these reports and ratings to assess and measure the ESG performance of companies against their peers.
Responsible investing doesn’t mean you have to accept lower returns.
ESG investments have a good track record, with remarkable performance during the pandemic. During market uncertainty, many companies with strong ESG track records showed lower volatility than others and investors turned to ESG for increased resilience. According to the American financial services firm Morningstar, the last quarter of 2020 saw record sales of $ 152 billion and total invested assets worldwide reached $ 1.6 trillion.
Morningstar analysis found that over a decade, 80% of equity funds investing in sustainability outperform traditional funds. ESG funds also demonstrate longevity: 77% of ESG funds that existed 10 years ago have survived, compared to 46% of traditional funds.
You don’t need to spend hours researching a company’s ESG history, scores, and share price with other companies to try to determine where to invest.
As with other equity investments, you can buy funds that invest in well-rated companies. It also reduces risk by providing much more diversification.
Apply the same investment principles with ESG investing as with all other capital investments:
1. Establish your goals and time horizon.
2. Get an objective analysis of your risk appetite.
3. Have a mix of assets and sectors in your portfolio.
4. When considering a new investment, analyze how it fits with the rest of your portfolio and influences its risk weighting.
5. Conduct annual reviews.
You can choose to hire a financial advisory firm that incorporates responsible investing into its advisory services. Some companies now consider ESG considerations, as well as traditional valuations, as part of overall investment considerations when assessing the suitability of investments for clients.
So responsible investing doesn’t have to involve more work on your part, and you can invest as you normally would, without compromising returns or your risk weights – unlike which companies benefit from your capital. ‘investment. You don’t need to focus your entire portfolio on ESG funds – indeed, you need the right asset mix to reduce risk – but it is a step you can take to help protect our environment. and our society.
All advice received from Blevins Franks is personalized and provided in writing. This article, however, should not be construed as providing personalized investment advice. The value of investments can go down as well as up, as can the income from them. Past performance should not be taken as an indication of future performance.
By Dan Henderson
Dan Henderson is a partner of Blevins Franks in Portugal. A highly experienced financial advisor, he holds the Diploma in Financial Planning and Advanced Qualifications in Pension and Investment Planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com