There was a study carried out in 2005 caleld ‘Who Cares Wins’, which is where the terminology, ESG first originated. ESG stands for Environmental, Social and Governance (ESG), and since then we have seen the financial services community strive to create more ESG-compliant investment options and features for the investing public.
A recent study by Morningstar found that the global inflow of capital to ESG-compliant investments has increased by over 72% to a record high of over $1.06 trillion by July 2020. In Australia, a study carried out by KPMG found that over $1.28 billion was directed to Responsible Investment (RI) options in 2020, which was an increase from just $983 billion in 2019.
Further, it was also found that fund managers and investment product providers are facing greater pressure to offer ESG-compliant investment options to the public. The same KPMG study found that 92% of investment managers involved had an RI policy, and of those surveyed it was found that 85% of all FUM was aligned to an ESG policy. We expect that this pressure will continue as more product providers seek to both attract and retain their investors.
This week our team at Ally Wealth Management is exploring what ESG investing is, how it’s carried out, and how investors can seek to implement this into their own investment approach.
Let’s start with what ESG investing is
ESG investing refers to an approach of considering Environmental, Social and Governance factors when selecting your investments and constructing your investment portfolio. This set of crtieria is usually in addition to the financials and operational criteria when analysing business and could include aspects such as;
- Environmental footprint of the business’ operations;
- Labour standards that the company implements;
- Activities the company is undergoing to reduce its carbon footprint;
- Employment criteria and that of selecting its board members;
- Energy efficiency of the company’s operations.
Naturally, there is much more and as an investor, you can identify your own criteria based on what’s important to you. In a nutshell, ESG investing refers to focusing on those companies seeking to have a positive impact on the environment and community, or a less negative impact than others.
Let’s look at how Fund Managers invest in an ESG-compliant manner?
There are two key ways that ESG investing is carried out, which are refered to as Positive and Negative Screening.
Negative Screening, firstly, looks to simply exclude those companies and investment options with a low ESG score. This might include, for example, companies operating in sectors such as gambling, tobacco, armorments, and coal miners. This could also include companies that have faced public scrutiny regarding their workforce practices.
Positive Screening, on the other hand, is a more proactive approach, which seeks to add those companies to the portfolio that have a relatively high ESG score, and are genuinely making, or seeking to make, a positive impact on the environment and wider community. This could include companies investing in renewable energy sources and even FMCG companies seeking to reduce the use of plastics in their packaging for example.
There is no right or wrong approach as to which performs better, and which is the superior choice for investors, but rather it is down to the choice of the individual as to how proactive they want to be when it comes to their investments.
Finally, let’s explore some of the options investors have for ESG-investing
There are many options to consider when it comes to identifying options to invest in an ESG-compliant manner. These include Managed Funds, via an Exchange Traded Fund (ETF) or even in direct equities that are involved in the ESG space. These could include options such as Vanguard US ESG Stocks ETF, Invesco Solar ETF, Betashares Global Sustainability Leaders ETF for example.
It’s important to do your own research here and consider which is the right option for you, and whether you wish to adopt an ESG approach to your investing or not. Be sure to speak to your Financial Planner to consider which is the right option for you in building and managing your own investment portfolio.
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General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.