The recent COP26 climate summit has made many people more conscious of their environmental impact. While the summit was all about the action world leaders are going to take, have you also wondered what you could do to help the environment?
Some common answers are to stay on top of your recycling, be aware of your energy consumption, or make the switch to an electric vehicle. But what if there was a way to use your investments to drive positive environmental change, too?
Well, with the rise of “ESG” investing, perhaps there is. But what is “ESG investing”, and how can it help fight climate change? Read on to find out.
ESG or “green” investing lets you align your money with your ethics
The acronym ESG represents the three key pillars of sustainable investing:
- Environmental – related to the conservation and protection of the natural world, looking at issues such as phasing out the use of fossil fuels, wildlife protection, and the production of green alternatives.
- Social – generally associated with how businesses and organisations treat their partners and employees. Issues might include worker and human rights, and customer satisfaction.
- Governance – referring to how companies are run and managed, tackling issues like gender equality, fair trading standards, and executive pay.
Investing ethically allows you to invest in companies that are making a positive impact in a variety of ways. A “green fund” will typically only invest in companies that are actively taking steps to help the environment and avoid putting money towards those that harm it.
ESG alternatives are also usually available for pensions, meaning that you can fund both your future, and the planet’s.
In fact, PensionsAge report that if someone with an average-sized pension pot of £30,000 moved their money to a green alternative, they could expect to prevent 19 tonnes of carbon entering the atmosphere each year.
If you were to move a larger pension pot of about £100,000 to an ESG alternative, you could be saving up to 64 tonnes of carbon each year. This is equal to roughly nine years’ worth of a UK citizen’s average carbon emissions.
Turning your pension green was found to be 57 times better for the environment than changing to a vegan diet, and 20 times more effective than driving an electric car. But with all the good ESG investing is doing, can they really keep pace with traditional funds in terms of returns?
Evidence suggests that ESG investing does not damage your returns
Many people are sceptical that the benefits of ESG investing simply must be balanced by reduced returns. However, this doesn’t appear to be so. In some cases, ESG funds have even gone on to outperform their non-ESG counterparts.
For example, S&P Global have reported that more than half of ESG-linked funds outperformed the S&P 500 stock market index between 31 December 2020 and 17 May 2021.
For reference, the S&P 500 contains the largest 500 companies in North America, including the likes of Amazon, Apple, Boeing, and more.
S&P Global had tracked 27 ESG exchange-traded and mutual funds with more than $250 million in assets under management and had found that 16 of them had performed better throughout the six-month period than the S&P 500.
It is worth noting that all 27 of the monitored ESG funds saw a performance improvement during this time, but to varying degrees. The largest price change during the period came in at 29.3%, while the smallest was 2.6%. The S&P 500 price change was 10.8%.
ESG funds have increased in popularity
We have previously covered how well ESG investing has fared during the Covid-19 pandemic, and the popularity surge ESG funds have seen over recent years.
One FTAdviser article claims that inputs into ESG funds increased by 2,500% between 2014 and 2019, and another FTAdviser article shows that investors weren’t done there; in 2020, ESG funds received almost four times the amount of investment that they did in 2019.
Plus, more than half of investors agreed that the pandemic made them more likely to consider ESG funds.
And it isn’t just gaining popularity in the UK, either. Nasdaq report that 77% of American fund selectors and 75% of institutional investors consider ESG factors integral to sound investing.
On top of that, 53% of institutional investors think that companies with a good ESG track record tend to generate better investment returns.
Contact a financial planner to discuss your investment strategy
If you’re thinking of making the switch to ESG investing, consider talking to a financial planner first. We can help you sculpt your investment strategy to truly reflect what you believe in and help you to generate the levels of returns that you seek.
If you want to find out more about ESG investing and where you can start, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.
Please note
The value of your investments (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.
