Environmental, social and governance (ESG) has risen to even greater heights as a potential route for investment since the COP26 climate summit in Glasgow.
Used to measure the sustainability and societal impact of an investment, ESG is not a new phenomenon.
But it is no longer a niche pension strategy and is increasingly being positioned as the populist choice, particularly so after COP26.
While industry headlines may lead on ESG investing as the best and most responsible investment option, it’s important to understand exactly what is involved and if it’s right for your financial journey.
In my experience, for the majority of clients it is an emotional and ethical decision to invest in an ESG portfolio.
It is also a decision which is made with the knowledge that your money is being invested for the greater good.
For many people, this is the right option and a path their financial planners can talk and guide them through.
On the flip side of this are the first questions that, understandably, often come up around how companies are assessed on ESG criteria.
How are they able to meet this standard and become classed as ESG?
Who chooses?
There isn’t a simple answer to this, as there are currently 34 GRIs, or standard global reporting initiatives, used to assess a company’s ESG credentials.
To be defined as an ESG company a business needs to meet a certain level of criteria, but this can differ as it depends on who is setting that definition.
They may not offer the same result – analysts will have different views of the priority of any given factors and their ratings will reflect that.
Take gender equality for example. One analyst may judge this on the level of representation of women on the board, while others may use a gender pay gap report.
Both are equally valid, but are open to interpretation and could result in a different ESG rating.
As this type of investment grows, there will need to be greater uniformity around how it is defined – something that will benefit both the investor and the companies involved.
There is also an interesting point around the thousands of companies our clients invest in.
On average, around 50% of these are already classed as ESG companies.
Keeping your investments flexible in new era of investing
Are your investments ending up in the doghouse?
A more traditional investment route across the full 100% of companies may prioritise global diversification across the whole portfolio of funds.
But if you go for purely ESG investing, choice is reduced to only 50% of these companies.
It is not necessarily a route that suits everyone – it all depends on the individual involved and their wishes and financial goals.
In my experience, for the majority of clients it is an emotional and ethical decision to invest in an ESG portfolio.”
Analysts suggest full diversification is probably still going to outperform the ESG portfolio of companies by around 1 to 2% a year.
But if more companies join the ESG ranks, which is what we’re likely to see in the future, it won’t be as difficult a decision to invest in them.
ESG firms will be in the majority, having met the standard as it becomes the norm.
This whole subject is a vast area and can be a confusing one in terms of investment.
Your financial planner can guide you through the process and advise on the best options to suit both your personal wishes and your financial ambitions.
David Gow is a director of Aberdeen-based Acumen Financial Planning.
