Global coronavirus lockdowns have grounded planes, limited cars on the road, and halted non-essential heavy industry. The effect on air pollution and wildlife in overpopulated areas has been well-documented.
In recent years interest in ethical and green funds has increased, partly due to increasing awareness of environmental issues. Sustainability, plastic pollution, and climate change have all garnered an increasing amount of media attention, such as the coverage of Greta Thunberg’s recent award of the Gulbenkian Prize for Humanity.
The coronavirus pandemic has also increased interest in ethical investing, with some socially conscious investors wanting to reward companies who they feel managed the lockdown responsibly. This has been reflected in the performance of ESG funds during the first half of the year.
So, what are ESG funds? How have they fared during recent years? And why should you be investing sustainably?
What is ESG?
ESG stands for Environmental, Social, and Governance criteria. ESG investments are investments that consider the environmental, social, and governance impact of an asset, as well as their financial prospects, during the decision-making process.
There has been an explosion in interest in ESG investing in recent years, with the total value of ESG investments rising by 34% between 2018 and 2020 to make up over £24 trillion in assets globally.
One explanation for this is the increasing awareness of environmental issues due to more media exposure, dubbed the ‘Blue Planet effect’.
The BBC’s Blue Planet series highlighted the devastating impact of human activity on the natural world. Similarly, Jo Ruxton’s documentary A Plastic Ocean sought to raise awareness of plastic pollution.
The idea of ESG investing grew out of the philosophy of ‘ethical investing’, which screened out companies and industries who were seen to have a harmful impact, such as those who profit from illicit industries such as arms production.
Since then, ESG investing has evolved, and now ESG investing aims to include companies based on desirable traits, rather than just excluding undesirable ones.
Some of the positive actions that this style of investing looks for are:
|Prioritising sustainability in the business’ sources of profit
|Maintaining good health and safety standards for workers||Ensuring transparency in how the company operates|
|Limiting the company’s carbon footprint
|Upholding the right of collective bargaining||Guaranteeing the independence of the board of directors|
|Avoiding the use of animal testing for their products
|Promoting good community relations||Upholding the rights of shareholders|
|Reducing the effect of pollution, such as plastic waste||Ensuring a fair gender balance among employees and board members||Managing conflicts of interest fairly|
How has ESG fared?
Although many stock markets have taken a fall due to the coronavirus pandemic, many ESG funds have performed well during the first three months of the outbreak. Data shows that sustainable funds achieved an average excess return of 1.83% in this period.
Although there are many factors for this, many experts have suggested that it is in large part due to the markets that these funds typically invest in.
The lack of exposure in areas such as fossil fuels and airlines has allowed ESG funds to avoid much of the fallout from the lower demand for energy and travel. On the other hand, many ESG funds are more concentrated in markets like tech or pharmaceuticals, areas that have been doing relatively well and have experienced growth.
Other experts have pointed to the public’s increasing awareness of the importance of the third ESG criteria: governance.
During the lockdown, there was much media attention about how companies responded to the crisis, with some prioritising the health of their employees and others who prioritised their profits.
Some experts have suggested that public perception of how responsibly companies reacted to the crisis has affected willingness to invest now that the lockdown is easing.
Three tips on how to invest sustainably
If current events have inspired you to invest your money more ethically, here are a few simple tips on how to do so:
- Do your research when picking a sustainable fund – There are many potential ESG funds to invest in, so it’s important to find the one that’s right for you. Many funds provide information on how the fund will be diversified, so you can choose the one that best fits your ethical viewpoint.
- Consider performance as well as sustainability – If you’re new to investing, it might be tempting to prioritise investing in funds that support the issues most important to you. While this is important, your main priority should be to find an investment that will help you to meet your goals.
- Monitor funds regularly or speak to an adviser – Make sure that you regularly review your investments to check if they meet your standards for sustainability and performance. It could also be sensible to speak to a financial adviser who can help you to manage your investments more effectively.
This year’s performance of ESG investments has shown that you don’t have to forego good returns to make ethical investments that align with your views. If you want your money to make a positive change in the world while growing your wealth, ESG investing might be right for you.
Get in touch
If you’re interested in getting involved with ESG investing, a financial adviser can help you find the right investment for you. Please email firstname.lastname@example.org or call 0115 933 8433.
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.