What is Environmental, Social & Corporate Governance (ESG) based investing?
ESG investing has become a very mainstream term in the investing world. But what does the terminology ESG actually mean?
The widely used understanding of ESG is that they are each factors taken into consideration that are input into the investment decision making process, rather than a defined outcome of investing per se. Measuring a firm on its environmental score, social factors and its corporate governance in the investment decision making process can give an indication as to the positive benefits a firm has to wider society, not just the profits/shareholder returns it is making. Some examples of each factor below:
Environmental factors: Climate change, deforestation, pollution.
Social factors: Health & safety, working conditions, employee diversity.
Governance factors: management diversity, risk management, shareholder engagement
In addition to ESG, other terms such as socially responsible investing (SRI), ethical investing and impact investing to name a few are also industry prevalent. Many of these terms it can be argued have largely the same theme, but with differing levels of stakeholder involvement/participation. Impact investing for example is designed to create a positive measurable impact on society or the environment, whereas ethical investing could just consider avoiding firms who create a negative externality such as crude oil exploration firms & tobacco firms for example, and supporting those that create a more sustainable way of living, e.g. carbon free power generation & recyclable packaging as a couple of examples. The challenge is that each term means different things to different people, and is largely based on an individual’s view of the world, and what they consider important personally.
Over the recent years there has been considerable growth in investments tending towards this persuasion, and it’s becoming increasingly apparent that an investment choice is not one between investment returns vs ESG, but one which can incorporate both in the long term. Mounting evidence suggests that funds/investments with high levels of exposure to ESG (measured using different ratings credentials) can in fact prove to be more resilient that those with less exposure. Many institutional investors are now driving the firms they invest into to make ESG an integral focus of their future vision in the boardroom’s where decisions are made, and as stakeholder participation increases, this will only self-perpetuate, and it is likely that businesses that do succeed in the future will likely have considered ESG and unified this into their business practices. The way in which objectives are achieved is becoming as important (if not more so) than the objectives themselves.
ESG Solutions available on the Novia Global platform
Novia Global is continuously striving to offer solutions that encompass all categories of investment, and that very much includes ESG based investments. We work with a number of DFM firms who offer ESG focused unitised solutions and ESG focused model portfolio solutions.
For more information on on the range of DFMs and Fund Manager we make available, please click here.