Post COP26, Environmental, Social and Governance (ESG), has risen to even greater heights as a potential route for investment.
Used to measure the sustainability and societal impact of an investment, it is not a new phenomenon but is now no longer a niche pension strategy and increasingly being positioned as the populist choice.
While industry headlines may lead on ESG investing as the best and most responsible investment option, it’s important to understand exactly what is involved and if it’s right for your own financial journey.
In my experience, for the majority of clients it is an emotional and ethical decision to invest in an ESG portfolio, and one which is made with the knowledge that your money is being invested for the greater good. For many people this is the right option for them and a path your financial planner can talk and guide you through.
On the flip side of this are the first questions that understandably often come up around how companies are assessed on ESG criteria to be able to meet this standard and classed as ESG.
There isn’t a simple answer to this, as there are 34 standard global reporting initiatives (GRIs) used to assess a company’s ESG credentials.
To be defined as an ESG company you need to meet a certain level of criteria, but this can differ as it depends on who is setting that definition. They may not offer the same result: analysts will have different views of the priority of any given factors and their ratings will reflect that.
Take gender equality for example. One analyst may judge this on the level of representation of women on the board, others may use a gender pay gap report. Both are equally valid, but are open to interpretation and could result in a different ESG rating.
As this type of investment grows, there will need to be greater uniformity around how it’s defined, something that will benefit both the investor and the companies involved.
There is also an interesting point around the thousands of companies that clients invest in, on average around 50% of those already be classed as ESG companies. A more traditional investment route across the full 100% of companies has global diversification that is across their whole portfolio of funds, whereas if you go for purely ESG investing, choice is reduced to that 50% of ESG companies. It’s not necessarily a route that suits everyone but it all depends on the individual involved and their wishes and financial goals.
Interestingly analysts suggest that full diversification is probably still going to outperform the ESG portfolio of companies by around 1 to 2% a year. The contradiction to that is if more and more companies become ESG, which is what we’re likely to see in the future, then it won’t be as big a decision to invest in ESG as the majority will have met the standard and it will become the norm.
ESG is a vast area and can be a confusing one in terms of investment, but your financial planner can guide you through the process and advise on the best options that suit both your personal wishes and financial ambitions.