Sustainable is the future
Over the last few years there has been a global shift in focus towards creating a more sustainable future with consumers and regulators demanding better standards from industries worldwide. Whether it’s plastic waste, climate change, burning fossil fuels or excessive farming, industries worldwide are being forced to make wholesale changes to the way they operate and are focusing their efforts on innovation and improving manufacturing efficiencies and most importantly, a positive impact on the planet.
The same can be said for investment funds, investors are now demanding to see better standards from the companies they are invested in and want to know where their money is going and what it is being used for. Businesses around the world are realising that to avoid being on the wrong side of history, they need to make changes to comply with environmental, sustainable and governance principles to play their part in a greener, healthier, safer and fairer world.
According to Morningstar, inflows into European sustainable funds have increased from £45 billion in 2018, to £108 billion in 2019. The number of sustainable funds available in the market today now totals 2,405. This interest in Ethical, social and governance investing has continued to increase during the Covid-19 crisis.
Sustainable investing has moved on from the niche to becoming the centrepiece of investment conversation and fund houses are committing to socially responsible and ethical investment, developing fund ranges which focus on investment in companies that have a positive impact on the world as well as avoiding those who have a negative impact.
This was the original form of this type of investing where companies or industries would be excluded from funds based on specific criteria, i.e. they made profits from: alcohol, gambling, tabaco or weapons; or the companies used animal testing or child labour.
As might be expected, these negatively screened ethical funds tended to produce lower returns and higher risk compared to other funds on the market because the investment universe would become limited and inefficient.
ESG investing refers to Environmental, Social and Governance investing. Rather than simply negatively screening out companies and industries, ESG also positively screens companies who meet a desired criteria with regard to their main business activities.
ESG issues that may be considered in the inclusion or exclusion of companies for investment in funds and portfolio are:
- Environmental risks created by business activity, i.e. their impact on air, land, water, ecosystems, and human health. ESG investments look for companies who endeavour to produce positive outcomes by avoiding or minimising negative environmental impact. Key areas such as climate change, air and water pollution, waste management, energy efficiency and water scarcity.
- Social risk i.e. the impact a company has on society. Some examples of this are a company’s commitment to equality, human rights, consumer privacy, data security and health and safety.
- Governance risk refers to the way a company is run, the board structure, financial reporting, business ethics and executive renumeration.
ESG investing is by no means a sacrifice of investment returns, quite the opposite. Where companies are meeting ESG criteria, they tend to be lowering costs and increasing profitability through energy and other efficiencies.
Industries and sectors that damage society and the environment are susceptible to either enforced regulatory change and/or evolving consumer habits, both of which can be detrimental to long-term returns.
The most popular companies in the global sustainable equity space right now are companies that are quite simply providing something which is better than the traditional competitor.
Throughout the Covid-19 crisis many sustainable investments have seen record returns on client investment. Being underweight in traditional fossil fuel industries, or airlines, will have helped ESG-aligned portfolios to avoid the significant losses incurred by these sectors in recent months.
We’re proud to have built portfolios which focus on ESG investment that will not only help you achieve your ethical investment goals but will also contribute to making the world a better place.
This article was written by Nick Evans, Financial Adviser here at Milestone and is not itself financial advice. If you want more information on ESG investing and are interested in our Ethical and Sustainable focused portfolios, please get in touch on 01246 903 053 for bespoke financial advice.