Environmental, Social and Governance (ESG) investing is becoming more and more prominent as the public’s awareness of sustainability issues increases and the fund management industry reacts to meet the new demand. Individuals are increasingly seeking financial products that are aligned with their environmental values. ESG investing refers to an investment strategy that incorporates environmental, social, and governance factors into investment decisions.
ESG can mean many different things to investors and ‘Ethical’ funds have been around for many years. However, the scope and definition has broadened, and many fund management houses are starting to use their size and power to influence companies into adopting better practises and behaviours in environmental and corporate governance matters. An example of this would be Shell’s commitment to be net zero in emissions by 2050.
There are broad principles that funds will incorporate into their investment mandates. For example, a typical objective of an ESG fund would be:
The Fund promotes environmental and social characteristics by excluding companies from its portfolio based on the impact of their conduct or products on society and/or the environment. This could mean excluding companies that engage in the following activities:
- Controversies i.e. companies which do not meet the labour, human rights, environmental, and anti-corruption standards as defined by the United Nations Global Compact Principles
- Non-renewable energy i.e. companies that own proved or probable reserves in coal, oil, or gas
- Vice products i.e. companies that produce adult entertainment, alcoholic beverages, tobacco products or gambling services
- Weapons i.e. companies that produce or produce specific and critical parts or services for nuclear weapon systems, chemical or biological weapons, cluster munitions, and anti-personnel mines
We have therefore introduced a new ESG range of portfolios to run alongside our standard portfolios. The ESG portfolios have been constructed using the same principles as the standard portfolios and there are 5 risk based solutions to choose from. We have used specialist ESG and/or multi-asset funds where possible and continued to use passively managed funds with the management brands we are comfortable and familiar with.
Investors need to be aware of the risks of ESG investing. There is no universal or agreed-upon definition of ESG-related risks, which may also be referred to as sustainability, non-financial or extra-financial risks. This can lead to ‘Greenwashing’ which is the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound.
As the ESG sector becomes more established, lots of new entrants are emerging into the market to cash in on the boom. These new funds may not have a proven track record of performance for investors to make meaningful comparisons and many will fail.
Please refer to the Brochure in the Resources section for further details regarding our ESG portfolios.