By David Gow, Director of Acumen Financial Planning
In this article, Director of Acumen Financial Planning, David Gow discusses his thoughts on ESG investments, the difficulties that can be encountered and whether it will become the new norm in the financial sector.
The current landscape
Rising in popularity across various industries, ESG has become a critical asset for companies to carry out, regardless of their size or portfolio. If carried out correctly, ESG strategies can affect operating profits by as much as 60% according to Perillon research and is widely viewed as one of the most sustainable ways to invest.
Becoming a global trend within the business world, ESG reporting mandates have grown in the last four years by 74% which to some may prove that it’s here to stay. However, despite 85% of asset managers citing it as a high priority, 64% flagged concern about a lack of transparency and corporate disclosure on firms’ activities. [1]
How to invest in ESG
There are various factors to take into account within ESG investments, including the complications around the criteria itself.
Companies or individuals can make an ESG investment based on the consideration of the environment, human well-being and the economy. This is demonstrated for example by Microsoft, as within the top 100 ESG companies to invest in, it is currently top of the list, not a surprise as they are a global brand. They have also committed to having zero waste and pledged in relation to the UN Goals for people to have access to clean water whilst also securing own water supply, aiming to have achieved this by 2030 which could attract an even higher range of investors across the globe.
76% of consumers have stated they will no longer buy from companies who treat the environment, employees, or communities poorly. However, many believe the financial performance of a company is directly related to environmental and social factors, which isn’t necessarily always the case.[2]
Companies can use their financial performance as a deciding factor to those interested in investing in their company but may not be as sustainable or environmentally friendly as they have advertised. This can confuse investors which may result in them investing in the profit rather than the environmental ethos that they were initially attracted to.
In my experience as a financial planner, I’ve found that ESG investments take a great deal of consideration. It is an emotional and ethical decision to make when investing in an ESG portfolio. For many, the decision is based upon the knowledge that your money is being invested for the greater good.
The difficulties and the complications
To be defined as an ESG company, there is a level of criteria that needs to be met to gain the status and this is something your financial planner can guide you through. It’s important to know that this may vary depending on who is setting it. The person granting the definition may have varying opinions on what meets their ESG standard which could result in different ratings across the board. For example, one company may believe their commitment to the environment exceeds the standard, while another thinks that they are not doing enough which will result in different ESG scores.
Without overall governance, this area can be tricky and changeable, but a company’s ESG status can be monitored by various parties including prospective investors, employees or partners and members of the public. While ESG was once a niche practice, it has become almost a trend – with issues like greenwashing becoming more common. However, this is expected to significantly change, as it is predicted that more legislation is to come.
In January this year, two new UK laws were passed and took effect in April. These were the Companies (Strategic Report) (Climate-Related Financial Disclosure) Regulations 2022 and The Limited Liability partnerships (Climate-related Financial disclosure) regulations 2022. Under these laws, companies must provide their reports and include non-financial and sustainability information statements.
With one in ten publicly traded companies adopting ESG, it can be confusing where to invest. Over time the majority of companies will hold these practices, so it may no longer be a deal breaker for potential investors.
Many global investment management firms are now responding to growing interest from investors by rebranding existing funds and launching new funds that target specific sustainability objectives. However, it’s good to be mindful as many organisations who have implemented ESG practices could also be trying to cover up poor business performance.
Whether ESG investing will become the norm
Compared to previous years, information and transparency are key when it comes to investors. Gone are the days when you could label your company as ESG practicing without having to provide evidence to support it. The prevalence of greenwashing has also demanded more valuable insights from investors into whether companies are following the correct processes, as well as an ongoing tightening of regulations.
Overall, it is evident that ESG investing will continue and become the norm. With the introduction of new laws and more in the pipeline, it will make it simpler when it comes to choosing where to invest with the help of financial planners.
Notes
The content contained in this article represents the opinions of David Gow at Acumen Financial Planning. The commentary in this article in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the reader.
ESG investing refers to investment strategies that consider environmental, social, and governance factors in addition to financial factors when making investment decisions.
Corporate governance involves the systems, principles, and processes by which companies are directed and controlled, focusing on the relationships among stakeholders.
Sustainability in finance refers to investment practices that aim to create long-term value by considering environmental, social, and economic impacts.
Greenwashing is the practice of companies misleading consumers regarding the environmental practices of their products or services, often to appear more environmentally friendly than they are.
Transparency in investing refers to the clarity and openness with which companies disclose their financial performance, risks, and ESG practices to investors.
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