Is ESG investing all that it’s cracked up to be?


two hiking brothers in the Scottish Highlands

One of the most recent movements in the investing space is that of “ESG” investing. ESG investing, also known as “sustainable” or “green” investing, is the act of using your investments to support companies that are committed to making a positive global impact.

However, financial services firm Morningstar have stripped ESG funds worth more than $1 trillion of their sustainable tag, raising fears that green investing may not be all it’s cracked up to be.

So, what is green investing, what are the difficulties that come with it, and is it really possible to invest ethically? Read on to find out more.

ESG investing means putting your money behind three key principles

ESG investing is the process of investing your money in companies who actively take steps to consider three main ideologies: environmental, social, and governance factors.

The environmental principle looks at what kind of impact the company has on the environment. You may wish to consider whether it is actively taking steps to become carbon neutral or if it is backing and advertising its own recycling scheme, for example.

Social factors look at how the company improves its impact on society. You may wonder whether the company champions and pushes for LGBT+, racial, and gender equality or if it has any twinned charities to make the world a better place.

Lastly, governance factors include things like diversity within the company, executive pay, and external communication. A company with governance factors in mind may advertise the diversity in its management structure or a more evenly distributed salary structure between management and team members.

Generally, a company that is considered ESG-worthy investment will be pushing for positive change in one or more of the above fields.

ESG investors should be aware of “greenwashing”

One of the issues facing ESG-conscious investors, however, is the concept of “greenwashing”. Greenwashing is where a company labels itself as more progressive or sustainable than it really is through false advertising or deliberately misleading information.

One of the most famous examples from recent history is that of fast-fashion brand Boohoo, which was accused of creating, and subsequently failing to fix, poor working conditions in its supply chain.

Boohoo was accused of paying supply chain workers in Leicester less than minimum wage and refusing to listen to union concerns.

Boohoo were also found to be lying about which materials were used in its clothes, with Euronews finding that 85% of Boohoo’s items contained fossil-fuel based, synthetic fibres in 2021.

With so many companies encountering issues with greenwashing over recent years, ESG investors have had more difficulty ensuring that their money is actually put towards sustainable practices.

The demand for ESG funds appears to be falling

ESG funds have performed well over recent years, with Money Marketing reporting that a leading fund manager had seen a 6,500% increase in flows into ESG funds over the last five years.

With such rapid growth, an eventual peak was bound to be reached, and it appears as though demand is now falling.

The start of 2022 has been slow for ESG funds, with early indications potentially signalling less money flowing into ESG funds this year than in 2020.

This could be because of a few different reasons. One is a lack of understanding when it comes to ESG investing among retail investors, with many people unaware that responsible investing is even an option.

Another is simply the inability to maintain the rapid growth in interest for ESG investing of the past few years.

The third and perhaps most important is that ESG investments have underperformed so far this year. Forbes report that ESG is struggling to find its footing in 2022, with Tesla stocks down 11% in January, and the popular US-based sustainable exchange-traded fund (ETF), known as SUSA, was down 9% in February.

Despite this, there are still ESG funds available on the market

Despite all the recent controversy surrounding ESG funds and investing, there are still plenty of funds retaining their title, offering responsible investing to those who wish to take it. And, despite the recent poor performance, it may be worth remembering that the green revolution is still taking shape worldwide.

As the world moves towards more sustainable practices, like electronic vehicles and natural power, ESG investing is likely to gain more of a boost. Companies paving the way in their sector could be set to grow as the world becomes more ESG sensitive.

If you’re looking to invest ethically, be sure to contact a financial adviser in order to discuss an investment plan that is right for you. We can help identify a balanced investment strategy that will adhere to your morals and be poised to earn positive returns.

To find out more about how our services can help you on your investing journey, please email 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.