Undoubtedly, the recent boom in sustainable investing is a trend that is here to stay. In the wake of the pandemic, investors are becoming more and more interested in exploring funds that benefit society in addition to generating returns.
How to simply define ESG
ESG stands for Environmental, Social & Governance. Under each of these sections, there are a variety of different considerations to factor into the analysis of the company.
Below are some of the main topics considered:
- Environmental & natural resources
- Social governance & climate change
- Human rights & diversity
- Health & safety issues
- Carbon emissions
- Labour standards & ownership
- Air & water pollution
- Employee relations & working conditions
Recent popularity
Inflows into European Sustainable funds have increased by 18% in the first quarter of 2021 compared to the last quarter in 2020, according to Morningstar’s research. The Covid-19 pandemic appears to have shown the importance of sustainability and driven clients to a more responsible investment approach.
Overall, sustainable investing now accounts for a third of all global assets and is projected to reach $53 trillion by 2025. All in all, it is an attractive and increasingly secure prospect for clients wishing to responsibly invest their money.
Greenwashing
Greenwashing is simply where a company over exaggerates their ESG contributions. It can be difficult to determine who’s greenwashing and who’s not. The most important thing for advisers to do is to research the funds, check the prospectus and the objectives, what companies they are investing in. Many of the ratings agencies are now producing ‘sustainable’ ratings on the investments, looking at stock selection and the investment house itself. This could help give peace of mind that they have a stamp of approval on their processes.
Diverse clientele
ESG is a great option for a variety of different types of clients. This means that the unique benefits that it can offer vary majorly across different clients, so it is crucial to lead them towards the best form of sustainable investing that suits them and their financial and ethical needs.
For example, one client may have strong ethical views; they could be strongly averse to investing in alcohol production or gambling for example. These clients will likely be more suited to investments operating a traditional negatively screened portfolio. Another client may be happy to invest in these areas as long as they have fair working policies, a diverse workforce and are actively trying to reduce their carbon emissions. Every client will have a different definition of what ESG means.
What’s more, ESG investing is especially popular with younger clients who want their investments to align with their values. But because it has high returns and is a growing market it could appeal to all. So advisors need to bear this in might when researching the best ESG funds for their clients.
Investing in the future
ESG is growing in popularity because in today’s ever changing world, clients want a financial legacy that actively helps to impact social change, and align with their personal beliefs.
Sustainability is no longer a niche issue, across the world individuals are taking matters into their own hands to commit to a more environmentally friendly way of living.
This worldwide drive is proof that ESG investing is by no means a fad and in fact, is here to stay. Therefore, advisors fully support ESG as an opportunity to help clients meet not only their financial goals but their sustainability ones too.