What is ESG?

Investors are becoming increasingly aware of the impact their decisions can have on our society and environment and are looking for more than just the potential for a financial return on their investments.

The demand for responsible investment is clear – recent research from Quilter found that over half of investors (56%) are likely to consider responsible investment now or will start at some point in the future.

So, what is ESG and what does it stand for?

–‘ESG’ refers to Environmental, Social and Governance factors that sit at the heart of responsible investment.

Environmental - How a company and its supply chain impact the natural world.

Environmental factors include:

  • a company’s carbon emissions and issues related to climate change
  • resources such as water and land use
  • Waste andpollution
  • Biodiversity loss

Social - The wellbeing and rights of people and communities.

Social factors include:

  • Human rights such as labour or working conditions
  • Data protection
  • Diversity, equity and inclusion
  • Supply chain management

Governance - The standards for running a company. Also known as corporate governance.

Governance factors include:

  • Board structure
  • Executive pay
  • Bribery and corruption
  • Political contributions

Responsible investment approaches

There are different responsible investment approaches which can and often are used in combination with one another. For example: 

ESG integration

Including ESG issues in investment analysis and decisions to better manage risks and improve returns.

Stewardship/Active ownership

Voting and engaging on ESG issues to improve company performance and disclosure.

ESG screening

ESG screening involves applying filters to lists of potential investments. This can be based on individual preferences, values or ethics or used to screen out entire sectors.  This can help you avoid certain areas based on your preferences, such as alcohol, gambling, tobacco, animal testing and a wide array of other ethical issues.

Beware of greenwashing

With the increased interest in responsible investment, there has been an increase in the concerns surrounding investments claiming to be eco-friendly when they aren’t.

Read our article to find out more about greenwashing and the things to consider when looking for ESG investments.

Financial advice

If you’d like to consider responsible investmenta financial adviser is best placed to be able to help you find appropriate solutions based on your personal preferences, values and goals.

 

As with all investing, your capital is at risk. The value of investments and the income from them can go down as well as up and investors may not get back all of the amount originally invested.