Earlier in the year, as coronavirus spread worldwide, nations retreated into lockdown. Shortly after, reports of a resurgence in nature began to appear.
In March, the Guardian reported that Venetian residents were witnessing the return of wildlife to their ‘tourist-free city.’
In the same month, the BBC reported ‘carbon monoxide had reduced by nearly 50% compared with last year’. And on June 10, the UK passed a significant landmark – going two full months without burning coal to generate power.
Inflows into ESG investment – those focusing on Environmental, Social, and Governance factors – have been on the rise for the last few years.
Could coronavirus help to increase ethical investment still further?
The FTAdviser points to a recent survey showing that ‘85% of surveyed UK IFAs had seen a rise in client requests to allocate capital to environmental, social and governance-integrated funds since the start of the Covid-19 outbreak.’
If you’re considering ESG investing as a way to align your investments with your values, here’s everything you need to know.
What is ESG investing?
When thinking of ESG investing, you might be forgiven for focusing on environmental factors. Helped by the success of David Attenborough’s Blue Planet and by the campaigning of Greta Thunberg and Extinction Rebellion, environmental issues have been in the headlines.
The climate crisis has been described by the UN’s environment chief, as nature “sending us a message,” according to a recent Guardian report.
Concerns over global warming and plastic pollution help to explain the increased investment in companies working hard to lessen the harm they do to the planet. But social and governance issues have played a part in the rise of ESG too.
Social factors – in ESG investment terms – include fair treatment of staff, diversity in the workforce, and fair wages. Issues of inequality, such as the gender pay gap at the BBC or protests of the Black Lives Matter movement, help to highlight these factors.
If you’re looking to match your investment choices to your values, you might opt for socially responsible companies with good track records on issues of equality and community. This could also mean not investing in firms that manufacture products known to do social harm, such as guns or tobacco.
Governance issues include the democratic appointment of shareholders and ethical practices. Failures in governance were particularly highlighted when they were at least partly blamed for the 2008 global financial crisis.
How does it work?
There are different ways for fund managers and companies to approach ESG investing. Here are three:
- Positive screening – this involves seeking out companies with a proven track record on ESG issues. To attract ESG investment a company should have a positive impact on society or the environment.
- Negative screening rules out investments in companies with a poor track record on ESG issues. This could include industries such as tobacco, weapons, or palm oil.
- ‘Best in class’ means choosing a sector that you’d like to invest in, then selecting the company in that sector that demonstrates the most commitment to ESG issues.
How are ESG funds performing?
Morningstar reported in April that ‘US ESG Funds Outperformed Conventional Funds in 2019’.
A Black Rock report confirms that in the first quarter of 2020, 51 out of Morningstar’s 57 sustainable indices outperformed their broad market counterparts. The same figure for MSCI indices was 15 of 17.
A previous criticism of ESG funds was that ‘to invest with the view of making a positive impact, growth or income would need to be sacrificed to some degree’. Figures for 2019 suggest that this is no longer the case. If you’d like to discuss the possibility of investing in ESG funds, please get in touch.
The future of ESG investing
In 2018, the FTAdviser reported that more than half (52%) of the millennials surveyed for a Schroders’ Global Investors Study were already investing sustainably.
As ESG investor numbers increases, the number of funds available has increased too.
This Morningstar graph includes figures up to October 2019 and shows 23 funds launched into the ESG market so far for that year. That compares to 15 in 2018, 12 for 2017, and only two in 2014.
Environmental issues have continued to make headlines despite the current crisis. It seems likely that David Attenborough, Greta Thunberg, and Extinction Rebellion will continue to be heard once the threat of coronavirus begins to pass.
The US’s withdrawal from the Paris Agreement on climate change is set to be finalised later in the year, while issues of social justice and equality currently take centre stage.
The rise in ethical investment strongly indicates investor awareness of ESG issues. Investors want the opportunity to invest in companies that align with their values on issues of Environment, Society, and Governance.
The increase in demand has already led to increased fund choices and greater inflows. And with 85% of UK IFAs reporting increased client requests for ESG investment since the onset of the pandemic, it shows no sign of slowing down.
Get in touch
Please get in touch if you have any questions about ESG investing. We’re here to help.
Please note:
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.