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The ABC of ESG Investing

E for Environmental.  S for Social.  G for Governance.

Rarely does a buzz word or phrase successfully make the transition into the establishment but ESG may be one of the few that has done so.  In a relatively short period of time it has become a key part of a global movement demanding more of the businesses and organisations that shape and impact the world we live in.  Rightly so, perhaps, given the magnitude and breadth of this impact in an increasingly global society where it is possible for a business to be more wealthy and more powerful than an entire country. 

Afterall businesses and organisations of all shapes and sizes are employers, producers, consumers, influencers, policy makers and regulatory gatekeepers.  Asking for transparency and accountability for their behaviour and actions seems reasonable enough in the context of the effects they can and do have on society and the world we all inhabit.

For those trying to bring in more ESG considerations to their investment portfolio Fixed Magazine has taken a look at the basic ideas behind it and sought some insight into what investors should be looking for.

What does ESG actually mean?

Investopedia provides a very useful description of what is actually meant by ESG including how it works and what ESG investing could look like.   In short the E for Environment considers how an organisation’s activities impact the environment, the S for Social looks at its impact on society and societal issues, and the G for Governance measures the way the business conducts and regulates itself.  Interestingly Bloomberg calculates that money invested based on ESG criteria will reach in the region of $53trillion by 2025.  If it hits these kinds of numbers it will account for a third of assets under management.

ESG in itself is actually a broad church rather than just a few specific criteria.  This makes it highly possible that the same company may have brilliant environmental credentials but the way that the senior management team behaves and conducts itself may leave a lot to be desired.  Similarly a company may be fabulous at looking after its workforce and positively engaging with the communities it is situated and involved in, but what it actually produces or does could be very damaging to the environment.

All this means it can be tricky to find, assess and choose organisations that really fit the ESG criteria you want to support in your investment portfolio, or (if you are investing via managed funds) to understand the choices and decisions made by the fund manager.

How can an ESG investor make good decisions?

The opportunity for investors to actually speak to an organisation directly are limited, which consequently means it can be hard to find answers to the questions you might want to ask.  Fixed spoke to Simon Bailey, an ex-fund manager who now works with organisations helping them to define and communicate their ESG credentials, to find out what questions investors should be seeking answers to, and where to find the information.

“ESG analysis is important because the issues covered have the potential to materially impact the financial performance of a company at some point in the future - ie caring about employees is not just about doing the right thing for the sake of it, but because it also leads long term financial benefits around motivation, staff turnover and loyalty” Simon explains.

“When assessing an organisation’s approach to ESG first review whether the issues identified by the company (typically in their Annual Report) overlap with your own perception.  If there isn't a material overlap ask yourself why might that be?

“Secondly assess their approach to dealing with the identified issues - do they provide clarity on the current status (ideally with relevant data) together with a clear plan and targets for improvement?  Search their corporate website for statements of intent or progress updates which can often be found in the blog section, or in news releases in the press section.  Some companies post links to podcasts, vlogs or recordings of conferences or round table events that they hold or present at.  These can be very useful sources of information.

“Finally try and assess how authentic the investment is in dealing with ESG issues.   Greenwashing can be an issue.  Companies that admit to areas that need improvement are more believable than those that present too polished an approach.”

What about ESG Funds?

For those not engaged in directly picking stocks and shares the most readily available way to shape your investment portfolio around ESG criteria is to invest in an ESG fund.  All the big investment houses offer these with more coming onto the market every year.  So much so that forecasts in the FT predict they will outnumber conventional funds by 2025.  Picking the right fund is just as important as picking the right stocks.

“The best way to assess a fund is to review the underlying holdings for names that you may recognise and where you might have a view on their exposure (positive and negative) to ESG factors” continues Simon.

“Do these investments marry up with the fund's marketing materials around their approach to ESG? Whilst there are numerous third party rating agencies which provide assessment on funds, these can be confusing as the agencies have different approaches and ESG analysis remains somewhat subjective. Better to rely upon your own views on the underlying investments - are you surprised by some of the investments held in an ESG focused fund?”

Where will ESG be in ten years?

“ESG investing has become a mainstream investment style in a remarkably short period. There are numerous drivers such as changes in regulation, societal changes in attitude and growing evidence around superior performance to support this shift.

“This certainly feels like a structural change that will continue for the foreseeable future” concludes Simon.

Simon Bailey, after 20 years as a fund manager now works for JLC Investor Relations helping companies communicate with investors, particularly around ESG related topics. 


October 2021