This seems to be the big thing right now and our regulator (the FCA) is moving to make discussion of ESG (Ethical, Sustainable & Governance) part of every investment review. So why is this and does it really matter?
Why consider ESG?
ESG considerations is being driven largely by 3 factors as follows:
- Client demand – There is huge and growing demand from clients for greater transparency about how their money is invested.
- Materiality – There is increasing recognition that ESG factors can have a positive affect on risk and return.
- Regulation – More regulatory guidance (from the FCA) stating that ESG factors should be considered as part of an advisers’ fiduciary duty.
There are actually increasing numbers of studies, showing signs that ESG investing has and is likely to have a positive impact on risk-adjusted performance! Why could this be?
ESG Risk factors
When placing your investments, if you are not paying attention to ESG concerns, this may in turn lead to increased risks such as:
- Loss of reputation (for your investments)
- Changes in social acceptance or products and services (poor investments)
- Emerging regulatory changes
- Poor corporate governance (bad decisions)
- High staff turnover (history shows quality staff = quality outputs)
- Compensation for environmental damages (think BP oil spill)
In a nutshell, ESG factors could actually indicate which are better-run companies for the long-term! There are also regulatory concerns that long-term ESG failures could then lead to financial and economic risks in the future.
What we call the “Sustainability risk” – are you investing in something that will not be here in 15 years-time? Imagine if petrol/diesel cars can be replaced with electric in the next few years – would you be happy investing in a petrol car producing business today – do you want to be left holding the baby when their business model goes bust? As we invest for the long-term, most of our clients will still be invested in say 10 or 20 years-time and therefore it is vital we take account of this with their investments.
Investor appetite
Research shows that people are worried about climate change, pollution and bio-diversity rather than ESG specifically. Perhaps seeing Turtles in distress on Green Planet is driving this specifically, however their general desire to be part of the solution is probably the main factor driving responsible investing right now. The investment association recently reported that ESG investing has increased by around 66% over the last 12 months or so.
ESG is a very complicated area, what do you want to avoid or include? For example: Intensive farming, carbon intense industries, alcohol, tobacco, pornography, uncontrolled emissions, arms, military equipment, animal testing, mining and many more – there are probably as many individual concerns as there are investors. It is impossible to accommodate every clients individual values as there will be so many conflicting priorities and beliefs.
So, how does it work?
Negative screening:
Traditional ethical funds. These will exclude companies that do certain things.
Positive screening:
Actively investing in things that will make a difference, eg: solar power.
But its not that simple! How would you treat for example an oil major (think BP or Shell) that yes is mininig huge amounts of oil now with the carbon intensity the follows but is also the worlds biggest investor in green energy of the future?
So what are we doing here at Financial Fortress? We now have a range of portfolios available that are specifically targeted at “ethical” and “ESG concious” investors, producing great results and reassurance that your performance is not compromised. All our funds now have a minimum track record of 3 years. We really are getting ahead of the game! Get in touch with your local experts to ensure your own Financial Fortress!
