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What is ESG investing?

10th Mar 2022
Brought to you by
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Tax Cloud is an R&D Tax Credits claim portal.

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What’s the first thing that comes to mind when you think of investing? For many, the caricature of ruthless cut-throat types who’d sell their gran for a quick buck come to mind. But thankfully that’s changing, and over the last few years, investing has grown a conscience.

Whilst choosing a company or fund to invest in will always ultimately be about profit, it’s now also about how your investment can change the world for the better. That’s Environment, Social and Governance (ESG) investing in a nutshell.

Investment for the good

We know that climate change is having a scary impact on our world, which is why ESG investing has been gaining popularity fast. A survey carried out by Schroders in 2020 showed that 47% of people frequently invest in sustainable investment funds rather than those that don’t consider sustainability factors. This was up from 42% in 2018.

It’s not just younger people who are getting in on the action too. In fact, the same survey showed 36% of ESG investors were aged 51 or older.

But what do investors really need to know about ESG investing? Here we take a look.

ESG in more detail

Ethical investment covers a pretty broad range of investment types. But ESG is a recognisable way of putting your money into companies and funds that incorporate Environmental, Social and Corporate Governance (ESG) factors into their business.

There are a few handy questions investors can ask themselves to check whether something really is ESG-compatible before making the leap:

E is for Environmental

  • Does the company use or develop green products, infrastructure or technology?
  • Has it invested in renewable energy itself, for example solar or wind power?
  • Does the company care about its carbon footprint and take steps to reduce it?
  • How does it safely dispose of its waste, and what recycling practices does it engage in?

S is for Social

  • Does the company have a wider social purpose or mission?
  • How does it treat its employees and customers?
  • When sourcing supply chains, does it place importance on the fair treatment of workers?

G is for Governance

  • Does the company offer pay incentives relating to longer-term business goals instead of simply earnings per share?
  • How are remuneration, perks and bonuses decided for its senior managers?
  • Does the company act in a transparent way when it comes to communicating with its shareholders?
  • Is there ample diversity in all the management teams and the board of directors? We’re thinking not just culturally but in terms of ages, gender and backgrounds.

This certainly isn’t an exhaustive list but you it’s a good starting point when thinking about ethical investing using ESG principles.

What are the best ESG investment platforms to use?

Obviously the exact platform an investor chooses for their investment portfolio is a decision only they can make, and seeking professional advice is always a wise move. However, online investing via a range of platforms has meant even the least tech-savvy amongst us can get in on the action. They’re typically less expensive than traditional investing platforms too, allowing investors to set up an account to buy and trade investments including bonds, stocks and funds. Popular companies include Nutmeg, Moneyfarm, OpenMoney and MoneyBox.

Mostly digital, these services are accessed via websites or smartphone apps. They’re generally a mix of investment management services and financial advice, and are quickly becoming an important way for socially-conscious investors to build their portfolio.

What are the risks with ESG investing?

According to a survey carried out in 2020 by HSBC, 49% of investors believe ESG can improve returns or lower risk. That's great, but it would be foolish of course to ignore the risks altogether.

Just like all types of investing, ESG funds come with an element of risk which are represented by risk ratings. Some are best suited to adventurous investors, whereas others appeal to the more cautious - and then there’s everyone in between.

Risk rating and further details will be made clear on each fund’s fund fact sheet. There are different styles of ESG investing too, each one bringing its own unique risks.

If you’re interested in ESB investment, it’s also important to consider investing in companies you actually don’t hold in high ethical regard. Sounds strange, but perhaps there’s a company you can think of that’s known for slightly dubious treatment of foreign workers for instance. By investing in the company, you could actually help make the change for the better by encouraging fairer practices. Although it’s tempting to only invest in companies who have sustainability and fairness nailed, by not investing your voice won’t be heard at all by the ones that don’t. Whatever it is you don’t like about a company or group of companies - from poor human rights to inaction on climate change - ESG allows investors to craft their whole portfolio in such a way that really makes a difference in the world. And of course, at the same time you’ll also (hopefully) bring about a decent financial return.

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