We all want healthy returns from our investment portfolios, but increasingly investors want to take in to account the environmental and other impacts of the companies they invest in as well. Environmental, social, and governance (ESG) criteria have evolved to address this need. They are a set of standards for a company’s operations that investors can use to assess potential investments. ESG criteria are measured across three broadly defined parameters:
- Environmental – What impact does a company’s operations have on the environment? What steps are they taking to reduce their impact and to safeguard the natural world.
- Social – How do companies manage relationships with their employees, suppliers, customers, and the communities in which they operate.
- Governance– Does a company’s leadership maintain high ethical and socially responsible standards with regards to factors like, executive pay, auditing, internal controls, and shareholder rights.
Environmental, Social and Governance (ESG) factors continue to form an increasing part of our everyday lives as the impact and harm of past (inattention/neglect/failures/indifference) becomes clearer. We learn more about these impacts as time goes by and as a result, we find that companies are constantly evolving and striving to do better. Ultimately, ESG is a term that encompasses investments which aim to have positive returns and a long-term impact on people, planet and on business performance.
Every individual investor will have a different perception as to what ESG means for them, depending on their own personal views, beliefs and how devoted to any given cause they are, there are no right or wrong answers. Likewise, each company will have its own variables and parameters to work within and each are on their own individual path to achieve their own ESG goals for their future sustainability.
We can all strive to make conscious decisions to invest in socially responsible, ethical funds and investment models if we so choose. Fund Managers and Discretionary Fund Managers (DFM) now offer an array of ESG investing strategies, they achieve these by investing in underlying assets and companies that endeavour to do more good than harm and that have strong commitment to ESG ethos. Investing in companies striving to pursue a greener more socially responsible business model whilst still returning a profit. It is impossible to ensure any fund is 100% ESG compatible given the differing priorities and concerns of investors and the complex web of interactions that all companies have with their human and natural environment. Nevertheless, the focus of these funds is to invest in companies which consciously strive to meet high standards to make their own business have a more sustainable future. Necessarily, this will always remain work in progress.
Clearly, the very nature of the industry in which some companies operate means they have a longer road ahead of them. In such cases it is important to recognise where they are working to achieve a better greener future. A prime example of this is the Oil and Gas industry. The leading industry names all acknowledge that some current practices are not sustainable. Consequently, they have committed to improving their future practices to achieve long term greener solutions to varying extents, whilst still providing us with a service which is invaluable to our day to day lives and continuing to return a profit.
When investing, clients are looking for a healthy return on their pensions and investments, whether they are choosing individual funds or using the services offered by Discretionary Fund Managers. Evidence increasingly suggests that companies that observe high standards towards ESG matters are more likely to outperform those that don’t.
ESG factors are useful indicators of a company’s overall strength, how it is likely to perform in the future, as well as risks that could impact its prospects. Responsible companies are less likely to be involved in scandals or catastrophes that could ruin their reputations and destroy value.
JTM are continually performing Due Diligence regarding ESG fund options.
Please feel free to contact us if you wish to explore your own personal ESG investment strategy.
Environmental, Social and Governance Factors
Environmental factors look at the impact a company has regarding the following environmental issues:
Greenhouse gas emissions
Depletion of resources
Waste and Pollution
Views how companies are managing relationships with their employees, suppliers, customers, and the areas where they operate:
Human rights and social justice
Employee relations and diversity
Health and safety standards
Focuses on company leadership regarding:
Structure and pay
Management & culture
Fair tax strategy
Avoidance of bribery and corruption