Investment in environmental, social and corporate governance: what is it and is it right for you?

September 2021

Investment in environmental, social and corporate governance: what is it and is it right for you?

Ethical investment has been around for a while – since the 1960s actually. It has been steadily gaining ground as awareness of environmental and social impacts on the environment grow. According to research set out in the Times, the global amount invested in ESG funds between April and June 2020 came to over £7 billion. But what is ethical investment, or to use the latest term used to describe it, investment in environmental, social and corporate governance? We look at what it is and how to determine whether it is the right choice for you. For specific advice on investments, tailored precisely to your needs, talk to one of our independent financial advisers at www.plutuswealth.com.

What is ethical investment?

Investopedia defines ethical investment as ‘the practice of selecting investments based on ethical or moral principles’. In its simplest form, it is the decision to invest your money in organisations whose principles align with your own. This could be a pension, investment or who you bank with.

What is environmental, social and corporate governance?

The ethical investment field can be narrowed further to focus on environmental, social and corporate governance, or ESG for short. These three criteria can either be taken individually or as a combination of principles when looking for suitable companies to invest in.

  • Environmental refers to any impact a company may have on the environment or climate. For example, what business it is in, its carbon footprint, its manufacturing processes and any links with toxic chemicals, or its approach to sustainability both in its own practices and those of its supply chain.
  • Social is about a company’s impact on society. For instance, racial diversity, its approach to gender and LGBTQ+ equality or its staff policies and hiring practices.
  • Governance relates to the management of a company and how it practises and promotes leadership diversity. It is also about how it interacts with its stakeholders and shareholders.

The drive towards investment in ESG has come partly from organisations seeking to change their practices and partly from better-informed investors looking to effect change. With increasing awareness in these issues, it is gaining ground within investment markets. In turn, this means more choice for investors. It also means greater opportunities for people to choose exactly which funds they want to put their money into.

Deciding which companies are good ESG investment opportunities

The decision on whether a company qualifies as suitable for ESG investment is carried out by a third party. There are a number of such organisations which do this, made up of independent companies and research groups. There are various classification systems in use, and fund managers will determine what is important to their investors before deciding which to select.  

Companies are scored on a 100-point scale. The higher their score, the more ethical they are considered to be. That assessment may concentrate on specific elements of a company’s practices. For example, this could be about placing greater weight on the environmental or governance factors. Alternatively, it could be about social issues. The ratings will take into account a company’s structure, look at its annual report and consider the sustainability measures and policies in place, amongst other criteria.

Do ESG funds perform as well as traditional ones?

In short, yes. That said, there are a few things to look out for when vetting ESG investment funds:

  • They should be actively managed. For any investment fund to perform, there must be some system in place to monitor market behaviour. Adjustments can and should be made in line with market volatility and changes to a company’s ESG score.  
  • Who is managing the fund. As with any investment fund, ESG funds need to be managed well in order to perform. There should be an experienced fund manager in charge with the skills and knowledge to administer ethical funds.  
  • What the fund’s strategy is. Funds should have a clear investment strategy in place to deal with changes to the market and to companies and their actions within them.

When should you invest in an ESG fund and how do you choose the right one?

Choosing to invest solely in ESG funds is a very personal decision. It comes down to what values and principles are important to you and which companies or investment funds you want to support or avoid.

When looking for an ESG fund to invest in, start by narrowing down the issues that are essential considerations: those that are non-negotiable for you. This should be a fairly short list – potentially two, maybe three issues. Then list those that are important but non-essential. This second list will be longer and will help to focus in on the funds that meet as many of your overall criteria as possible.

Help with ethical investment from the experts

Unless you are an experienced investor, any type of investment, whether related specifically to ESG or not, could be complicated and confusing. At Plutus Wealth, we are here to help you make the right decisions that fit in with your values and needs. Simply call or write to us to book an appointment or a free initial consultation and take the first step toward ethical investment. Find us on 020 7871 5200 or at info@plutuswealth.com.

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