ESG: easy as one, two, three

Photo by Micheile on Unsplash

There is nothing like a good song to unite people in supporting a cause. John Lennon’s song “Imagine” is a great example of music being created to challenge human division and violence, inspiring hope for positive change. For marketing managers in investment firms, imagine how engaging you could make ESG by remastering the Jackson Five’s classic, ABC:

ESG, easy as one, two, three. Or simple as Do re mi.

But what exactly is ESG and why has it become so prevalent in finance?

An investment criteria

Milton Friedman stated that there was only one social responsibility for firms which was to increase their profits. In fairness to him, he did mention that firms should do so as long as they stay “within the rules of the game.” The term “rules” is loose and it is undeniable that the business environment of the 20th century is not a good indication of how firms should behave in a world increasingly impacted by the effects of climate change.

There are modern rules to ensure firms can thrive, provided that they have high levels of transparency, accountability, and performance on their environmental, social, and governance criteria:

• Environmental: The environmental impact of a firm such as its carbon footprint, energy use, resource consumption, and waste creation
• Social: A measure of how diverse and inclusive a firm is as well as how it treats its workforce and the wider community
• Governance: Understanding the practices and control mechanisms of a firm to ensure its decision-making is legal, compliant, and effective

ESG investing refers to when financial institutions or individuals integrate these criteria into their investment processes and decision-making, going beyond the analysis of the prospective returns of a firm or financial product.

The rise of ESG

Responsible investing is nothing new. In the 18th and 19th centuries, religious groups such as the Quakers refrained from investing in commercial activities relating to tobacco, slavery, or alcohol. In the 1960s, university endowments funds excluded investments in companies doing business with South Africa in a time of Apartheid.

Since then, regulations and regulatory standards have risen to guide investors to take into consideration ESG criteria that go beyond purely financial concerns. The UN’s Principle for Responsible Investment guides investors on how to best integrate ESG factors in their investment process. The Task Force on Climate-Related Financial Disclosures thrives to increase transparency and mitigate the underlying climate risks of investments.

Financial considerations are already quite complex when deciding how to invest optimally so why would we need to complicate the decision-making by adding ESG criteria into the mix?

There are many benefits that accrue to firms proactively working to increase their environmental, social, and corporate governance transparency and performance. The following benefits could also result in lower risk and higher returns for investors:

• Business growth by acquiring and retaining customers looking to work with high ESG performing firms
• Cost reductions by reducing waste, energy consumption, and employee turnover
• Regulatory compliance to prevent fines and voluntary ESG reporting to achieve competitive differentiation
• Workforce productivity by attracting mission-aligned and engaged employees
• Future-proofing your operations and supply chains by derisking investments with lower payoffs or high climate-risks

ESG investment strategies

So how exactly do you use ESG criteria when evaluating investment opportunities? There are mainly four types of strategies when considering ESG investing:

1. ESG integration: When an investor considers ESG ratings or key-performance indicators such as the “carbon footprint per product sold” to evaluate underlying risks or opportunities
2. Exclusionary investing: Removing investments from a portfolio or refusing to invest in companies involved in commercial activities relating to weapons, tobacco, or fossil fuels
3. Inclusionary investing: Proactively favouring companies with the highest levels of ESG performance or disclosure relative to their industry peers
4. Impact investing: Deciding to invest in companies whose purpose alongside profit is to drive a positive social or environmental impact

Some investment management firms are specialised in one strategy, whereas others include a variety of ESG approaches to their investment thesis.

Getting involved in responsible investing

It’s understandable to feel powerless in the face of large institutional investors such as Blackrock or Vanguard when looking to create an impact through your own investments. However, every pound, dollar, euro, or yen you decide to invest in ESG funds is still a unit of currency that is not financing fossil fuels, firearms, or gambling.

There are great options to help you make environmentally and socially responsible investments. One of these is Clim8 Invest. Founded by Duncan Grierson, their mission is to move billions of pounds out of fossil fuel investments, ensuring that the products they offer can finance a cleaner future. Through their platform, individual investors can channel their money to investment portfolios of listed companies proactively working to tackle climate change. Whether you are interested in equity or bonds, you can support companies in a wide range of sectors, from clean energy and technology to smart mobility and recycling.

“The mission of Clim8 is to provide an easy to use digital platform so that anyone can invest into companies that are making an impact on climate change. We are very excited to have exceeded our funding targets, confirming strongly that investors believe that sustainability investing is a growth sector.”

Duncan Grierson, Founder & Chief Executive Officer

If you are interested in socially responsible investing or looking to get involved with ESG investing, I would recommend you research what Clim8 Invest have to offer. You could start investing with as little as 25 pounds! No matter how much you can invest or how much of your existing portfolio is in ESG investments, all dollars are born equal and every dollar counts to trigger climate action.

Disclaimer: I do not provide personal investment advice and I am not a qualified licensed investment advisor. Conduct your own due diligence, or consult a licensed financial advisor or broker before making any and all investment decisions.

Had to cover the legal bit :)