Environmental issues have dominated headlines in recent years, including the effects of global climate disruption and plastic pollution. Many activists, such as Sweden’s Greta Thunberg, have worked tirelessly to raise awareness about sustainability and reducing society’s carbon footprint.
The increased awareness of environmental issues has led to a growth in ESG and ethical investing. The outbreak of the coronavirus in Spring 2020 only accelerated this trend.
If you’re interested in ESG investing, you may have wondered how it has fared in recent months. Read on to find out how ESG investments have performed during the pandemic.
ESG describes a set of standards used in ethical investing
ESG is a term that is used to describe the three main factors that are used to measure the sustainability and societal impact of a company. This stands for:
- Environmental: When you hear the word ESG, environmental factors probably spring to mind. This category deals with the conservation of the natural world and may consider issues such as the energy efficiency, pollution, and carbon emissions of a company.
- Social: This factor generally considers the relationship the business has with its workers and the community. Areas that an investor may focus on include human rights, working conditions, and customer satisfaction.
- Governance: This category assesses the standards to which the company is run. This may involve issues such as the fair election of board members, the pay of executives, or political lobbying.
If you want to match your investments with your values, ESG can be a great way to do so, ensuring that you only invest with socially responsible companies.
ESG factors can be reflected in investment strategies in several ways, but the three main ones include:
- Positive screening: This strategy involves choosing to invest in companies which have a good track record on ESG issues. You may do this by diverting a portion of your portfolio to investment opportunities which meet certain standards or operate in industries such as renewable energy.
- Negative screening: This method involves actively avoiding investing in companies which don’t align with your values or whose operations you feel will harm performance in the long term. For example, you may choose not to invest in industries with high carbon emissions.
- Engagement: Typically done by institutions rather than individual investors, this strategy seeks to change the behaviour of a business through using shareholder power to improve their ESG credentials.
2020 saw a significantly increased interest in ESG investing
In recent years, the increased awareness of ESG issues has resulted in an increased interest in ethical investing. According to a report by financial services provider Morningstar, published in FT Adviser, inputs into ESG funds increased by 2,500% between 2014 and October 2019.
This increased interest in ESG investing also continued throughout 2020. According to a survey by insurance provider Aviva, over half of people surveyed stated that the pandemic had made them more likely to consider ESG factors when investing.
Furthermore, among those who already consider ESG when investing, 81% of people said that the pandemic had made it even more important.
The change in attitudes towards ESG can also be clearly seen in a report by investment banking company Federated Hermes. The report, published in FT Adviser, revealed that 85% of surveyed UK financial advisers had seen a rise in client requests to allocate some of their capital to ESG funds since the start of the pandemic.
The focus on sustainability aided the performance of many ESG funds
For many investors, the coronavirus pandemic was the first ‘acid test’ of ESG funds, and it appears to have demonstrated its reliability.
Many ESG funds invest heavily in industries such as pharmaceuticals and technology, both of which saw strong growth during the pandemic. However, one of the main reasons why ESG investing performed so well is its focus on sustainability.
The pandemic impacted many aspects of our daily lives, causing disruption to many businesses, halting flights, and reducing the number of cars on the roads. This made many investors realise the importance of sustainability.
For example, due to the significantly reduced demand, the pandemic caused the price of oil to fall. Whilst many had previously seen the energy sector as a fairly reliable investment, to many investors the pandemic demonstrated its fragility.
On the other hand, the pandemic also highlighted that ESG funds could be a dependable and reliable investment choice.
According to Fidelity’s Putting Sustainability to the Test report, published in the FT Adviser, stocks that had a higher ESG rating were significantly less prone to volatility in the market, falling far less when markets collapsed and rising less when they recovered.
Furthermore, the report highlights that stocks with higher ESG ratings outperformed those with lower ratings in every month from January to September, with only one exception.
This resilience that ESG funds demonstrated during this period of economic disruption has made them an attractive option for many investors, proving that investing ethically can have its rewards.
Get in touch
If you’d like to match your investments with your values with ESG, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.
Please note: The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
