ESG Investment

August 20th, 2019

The focus on environmental, social and governance (ESG) responsibilities is a key developing theme in the investment world. This applies both institutionally and in to collective investments world. The picture above is of the “Great Pacific Garbage Patch”, it would be hard to find a more graphic illustration of the harm being done (to the planet).

The UK pensions minister recently said that “…pension fund and investment managers must “do the right thing” and take their environmental, social and governance responsibilities seriously to help combat climate change. New government regulations requiring pension scheme trustees to set out clearly their ESG and climate change policies have been a game-changer and focussed minds. Pension schemes can identify investment opportunities which will make market-beating returns for members as we move to a low-carbon economy. They ought to be thinking about the assets that drive new investment in important sectors of the economy: smaller and medium sized firms, housing, green energy projects and other infrastructure which deliver the sustainable employment, communities and environments all of us wish to enjoy.”

Such comments apply equally to investment managers. Governments globally are introducing legislation to encourage sustainability e.g. a recent wave of bans of single use plastics in places including such as Britain, Kenya, India, Japan, across Europe and New York State. The European Commission has published a European Strategy for Plastics (in a Circular Economy). China and Malaysia have made recent decisions to stop importing waste. And so on….

Morningstar have produced a report that, at the end of June 2019, identified 2.232 funds domiciled in Europe that state they use ESG criteria or pursue a sustainability-related theme or seek measurable impact alongside financial return. These criteria highlighting the different terminologies you might come across to describe these fund types – ESG, Impact and Sustainable.

Fund managers can allocate capital to companies that meet these criteria, this lowering the cost of capital to these businesses. Individuals are then increasingly looking to user their investable assets as a financial vote for businesses that incorporate and integrate sustainability  into their strategy and operations.

In summary, there is little doubt that ESG focus will be an increasingly key element of investing moving forward.