Hayley Warner, Trainee Investment Adviser, from Charles Stanley in Oxford offers an insight on ‘ESG’ investing.
I started my ‘discovery’ into environmental investing when our online platform Charles Stanley Direct asked if I would like to be a part of the new socially responsible investing project that they were looking to launch. The project would include looking at the three areas of ‘ESG’ investing – Environmental, Social and Governance. I decided to tackle the environmental arm of the subject, not least because it is now increasingly becoming a dialogue with many friends, family and clients, but also a subject where I was feeling an increasing need to ‘do more’ to contribute to a more sustainable future.
It is a subject that certainly divides people and provides some very emotive responses from both sides, which I was intrigued to explore. The views expressed here are my own opinion and I remain sensitive to opposing views. The complexity of the subject means that people can have multiple, ever changing views, which in some areas will inevitably contradict one another.
On speaking with various members of the public, I quickly realised just how many differing views there are. Some people felt that, as pressure on the natural environment is not directly affecting them and will only affect generations in the future, they do not feel an immediate need to make a change. Further, people are often happy to remain exposed to fossil fuel investments and damaging non-renewable resources if investment performance is strong or the income return is hard to beat – which traditionally was the case.
To the contrary, others believe that by investing only in positively screened companies, you weed out companies that run inefficiently and therefore over the long run, socially responsible investing is better overall for returns.
What Should Businesses be Doing?
Having attended various conferences and seminars on the subject, it is clear that many businesses now share the same view. For them, to run a more economically friendly business (from the practices they use from/ the supply chain to moving into carbon neutral office spaces) just makes sense. Some firms believe that making the changes now, means they are ahead of the curve in a move that will eventually be the norm for businesses, and by being ahead, they will reap the benefits first. It can also be said however, that these very same businesses are lucky enough to both have the capital to make these changes and are technologically advanced enough to run their operations smoothly enough in a sustainable way.
To really have a positive impact, the businesses that need to support sustainability include those in clean energy, waste management and recycling, resource efficiency (smart grids, smart buildings), water sustainability (treatment and distribution) and sustainable consumption and production (farming). On a business level, these all rely on technological advances.
What Should Investors be Doing?
For investors, exclusions or restrictions can be used to limit exposure to non-sustainable
business practices. Exclusions can, however, stall the move into a ‘greener world’. Whilst this process can exclude key controversial business activities, it also does not recognise companies that are trying to expand into alternative and renewable practices. Engagement of shareholders through proxy voting and attending AGM’s is key to progression for companies. If we do not invest in the company, and as a result take advantage of the opportunity to vote against actions we do not agree with on an environmental level, the companies will not adapt or change their business practices.
If shareholders are voting against certain practices, it will put pressure on the firms to change. These firms could also have the largest influence to be able to action change within the market and by excluding them from an ethical investment universe, this could negatively impact progression in the business world. I also acknowledge that some businesses are not willing to change and therefore in these situations, exposure must be reduced.
Ways to Invest Responsibly
As we watch David Attenborough’s programme Seven World’s, One Planet, it is clear to see that Socially Responsible Investing is more important now than ever if we are going to unwind damage that could soon become irreversible, but there are challenges. There are no standardised criteria for socially responsible investing which means that it is very much based on people’s personal views which as explored above, can cause complications.
Whilst there is no set framework, various steps can be taken to ensure funds are invested positively and their values are in line with other firms, one example is companies can become signatories of the UN Principles for Responsible Investment.
Many fund houses are now releasing socially responsible funds and use five different set definitions to follow for socially responsible investing.
These are as follows:
- no ESG Considerations – ‘traditional’ investment based on risk and return
- ESG Exclusions – this removes any firms that invest in specified unethical criteria
- ESG Integration – this uses positive screening rather than negative screening
- ESG Engagement and Active Ownership – fund houses actively take part in voting and attend company meetings on behalf of investors. They take a collaborative role with firms to drive change
- Sustainability themed and impact focused – by having focuses rather than exclusions, you don’t miss out on growth in areas that are trying to make positive change. Expectations of both social/ environmental and financial outcomes so best of both for investors.
There is certainly pressure on companies to do more. It is interesting however to explore if education should not just come from the large blue-chip companies, but also if it should be taught in schools from a younger age so being socially responsible is ingrained in the habits of the younger generations.
Technology is certainly going to be the key driver of change which does bring further complications as this is far more accessible to younger generations and indeed, developed, more wealthy communities who have access to technology.
On carrying out my ‘discovery’ into environmental investing it has become clear that this is not only a theme or trend for investing that will eventually go out of fashion, but a new way of life for businesses and investors alike which needs to be embraced at all levels.
For change to really happen, companies, governments and individuals worldwide, have to work together, be truthful about their consumption and take a long-term view. It is perhaps not always immediately obvious that our actions are creating positive change, or there is a feeling that individual changes are only a ‘drop in the ocean’, but even small changes will add up over the longer term and we will collectively see the benefits – both in lifestyle and in investment returns.
For more information about Charles Stanley’s Bespoke Discretionary Managed service please contact:
Hayley Warner, Trainee Investment Advisor on 01865 987 485 or email Hayley.Warner@charles-stanley.co.uk
The value of investments can fall as well as rise. Investors may get back less than invested. Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority.