3 powerful reasons why ESG investing could be the right choice for you
If you are always searching for new investment avenues, Environmental, Social and Governance (ESG) investing may already be on your radar.
ESG investing means choosing to invest in companies that are committed in some way to green, ethical and sustainable business practices and can be a great way of aligning your wealth with your morals.
ESG investing can help you align your investments with your ethics – and it’s more popular than ever
ESG investing began back in the early 1970s, when investors began boycotting companies who supported the South African apartheid, and angling their investments against companies who manufactured arms for the Vietnam War.
Today, ESG investing has expanded into a worldwide investment opportunity that can help you positively contribute to all kinds of global issues.
Indeed, ESG investing is more popular than ever. In 2021, according to Wealth Adviser, a survey of more than 700 UK investors showed that a quarter of participants planned to make sustainable investments by 2025, while one fifth were planning to do so by the end of 2021.
Read on to find out how an ESG fund chooses where to invest, and how your finances could benefit from ESG investing.
How could a company be defined as “ESG-friendly”?
ESG funds – a portfolio of equities and bonds in which you might choose to invest – use strict guidelines in order to consider a company “ESG-friendly”.
In the UK, as of February 2022, ESG funds follow the Investment Association (IA) framework in order to decide on the ESG status of a company. Funds can choose to “exclude” companies whose practices clash with their ethics, or alternatively select companies that actively “steward” good causes.
Here are some common examples of environmental, social and governance factors that companies can prove their involvement in, in order to be considered “ESG-friendly”.
Environmental factors can include, but are not limited to:
- The company not dealing in fossil fuels, or actively dealing in “green energy”
- The company reducing or banning the use of animal products, such as dairy, meat, wool, silk and leather
- An organisation not producing corrosive chemicals, or restricting these chemicals’ proximity to wildlife and natural landscapes
- A business promoting the safe and sustainable disposal of plastic and other non-biodegradable materials.
“Socially conscious” businesses tend to be those that:
- Prove the fair payment of workers both in the UK and overseas
- Ensure good labour conditions, including fair working hours, access to healthcare, good quality facilities, and protective equipment
- Give back to the local community in which they work, such as by making charitable donations.
Finally, here are some governance factors that tend to set ESG businesses apart:
- The company does not donate to, or is not involved with, governments that are reported to violate human rights
- The business has a positive attitude towards diversity and inclusion at all levels
- There are no allegations of internal corruption, such as tax evasion or misconduct, against senior company officials.
Depending on your personal beliefs, and the causes that matter most to you, you can choose to focus on one or all of the ESG factors when investing.
In addition to the ethical benefits of ESG investing, there can be major financial opportunities in this area too. Here are three powerful reasons why ESG investing could be right for you.
1. ESG investing may reduce your carbon footprint
If you are trying to do your bit for the planet, you might be focusing on the practical things, such as switching to an electric car, or buying cruelty-free cosmetics. But have you ever considered that your investments could lower your carbon footprint?
By actively investing in companies that are committed to better production standards or are putting some of their profits back into environmental initiatives, you are literally “putting your money where your mouth is” when it comes to the planet and human rights.
Corporate ethics are becoming an increasingly public conversation. The BBC has reported that Amazon are facing criticism for their treatment of workers, for example, causing public disapproval around the world.
When it comes to making smart investment choices, ESG factors probably won’t be your only criteria – but by making them a part of the conversation with your financial planner, you could be taking a step in the right direction.
By choosing ESG investing, you could potentially grow your wealth while also having a positive effect on a world issue that matters to you.
2. ESG investments can offer positive returns
Research published by FTAdviser shows that, during the first quarter of 2020 (even during the Covid-19 pandemic market dip), 89% of ESG companies outperformed their broad market peers.
This shows that, even in a difficult time for the world economy, ESG investing could still be a reliable option that potentially provides opportunities for positive returns.
In addition to past performance, it is predicted that sustainable companies may continue to outflank their broad market counterparts in future, due to the increasing alertness of investors to ESG issues.
According to UK insurer Aviva, 72% of pension savers considered ESG factors when investing in 2021. This is just one example of how ESG investing is growing in popularity, making it all the more attractive to both seasoned and new investors.
If you are searching for peace of mind for future years when investing, the likelihood is that sustainability isn’t going to go out of fashion.
3. The younger generations could make ESG investing the “new normal”
When you are choosing where to invest your hard-earned money, you need to think about the future, not just the present. Trends in the market can be unpredictable, it’s true – but when it comes to being socially and environmentally conscious, the younger generations are taking the lead.
YouGov reports that Generation Z – those born after 1996 – are 1.4 times more likely to pay a premium for eco-conscious products. Indeed, the younger generations, with role models like Greta Thunberg at the helm, are focused very clearly on ethical consumption, and it is probable that this exacting attitude will be reflected in their investment choices going forward.
In fact, it already is. A CNBC study shows that around 19% of Gen Z, and one third of millennials, exclusively invest in ESG-friendly companies, compared with just 2% of baby boomers.
As the decades pass and Generation Z dominates the workforce, it is highly likely that ESG investing will become the new normal, providing even greater wealth opportunities for investors if they focus on sustainable choices.
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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.