6 Minute read
Key takeaways:
Whether it’s the shoes we wear, the cereal we eat or the washing liquid we use, by choosing brands that align with our values, we’re able to vote with our wallets for the kinds of businesses we want to support. It can be the same with our investment strategies.
So, how can you get into ESG investing? What are the advantages and disadvantages? Can you really make a decent return when you’re driven by principles?
ESG investing involves selecting investments based not only on potential performance but also on the sustainability i.e. how a company is run and how it treats its employees and the environment.
Because our values, drivers and motivators are different, for some people this could mean avoiding companies producing alcohol or tobacco. For others it could mean shunning businesses involved with fossil fuels, gambling and human rights violations. Or it could mean investing in companies that ‘do no harm’ – i.e. those that treat their employees well or have a low carbon footprint.
In essence, ESG investing can help you build a portfolio aligned with your values on social responsibility. An ESG investor favours companies making a positive impact on people, society and the environment.
If you’ve explored the idea of investing according to your principles, you’ve probably seen a few phrases thrown around. In addition to ESG funds/stocks, people also talk about ‘ethical investing’, ‘sustainable investing’ or ‘socially responsible investing (SRI)’. You may also have heard the term ‘impact investing’ used in these conversations.
Whenever you see these terms, it’s likely both values and returns are being considered during the investment decision-making process.
"It's frequently noted ESG investing dates back to Methodists and Quakers in the early 1900s – these groups avoided investing in companies involved in gambling, alcohol and weaponry."
Whatever you call it, this type of investing is based on your values and what you care about. Let’s look at some of these in more detail:
"One of the key drivers of growth has been the climate change discussion – especially post-pandemic – which has encouraged people to consider better environmental choices."
Between 2019 and 2021, global assets in ESG investment products almost tripled, rising from roughly USD 1tn to USD 2.7tn, according to data from Morningstar. In 2021 alone, more than USD 596bn was invested in these funds. That compares to just over USD 172bn in 2019.
One of the key drivers of growth has been the climate change discussion – especially post-Pandemic – which has encouraged people to consider better environmental choices.
A survey conducted in 2020 by Boston Consulting Group had 70% of participants saying they’d become more aware of the link between human activity and climate change following the onset of the Covid-19 pandemic. Three-quarters of respondents said environmental issues were as concerning as – or even more concerning than – health issues.
Investing with a platform that includes ESG Risk Ratings is one simple way to get started with sustainable investing. An ESG Risk Rating tool does all the hard research work for you, so you can invest in stocks based on how a company is run with no fuss.
CMC Markets has partnered with Sustainalytics, who use a sophisticated methodology to rate a company’s economic exposure to Environmental, Social and Governance risk and how well it’s managing those risks. Company ratings are compared across peers and subindustries with fully integrated corporate governance research and ratings.
This information is fed into your investing platform on the individual stock summary card in the form of a clear ESG Risk Rating. The lower the score, the better the rating.
One of the biggest criticisms of ESG investing is that criteria for what is and isn’t sustainable can be vague.
You may, for example, believe a producer of vegan hamburgers is an ethical stock to buy. But what if those burgers have a high fat and salt content? Someone else might take a different view and pass on the stock as a result. A company producing electric vehicles may appear environmentally responsible, but if its manufacturing process produces lots of toxic chemicals and emissions, investors must weigh up the pros and cons before parting with their cash.
It’s also worth noting each ESG fund has different parameters, and these may not necessarily align to your values.
Another misconception to clear up is that ESG portfolios only focus on companies involved in activities like renewable energy, recycling and sustainable agriculture. Many funds will have substantial allocations to popular blue-chip stocks – so long as these have met predetermined sustainability criteria.
"If more people start to invest in sustainable companies, other businesses may start to take note.”
Investing sustainably may give you the satisfaction that you’re backing companies with positive ESG factors, such as not polluting, high labour standards, respecting human rights, and anti-bribery/corruption.
As for returns, between 2018 and 2021, we have seen many ESG funds/ETFs have performed similarly to major index ETFs in their respective country. And, over some periods, have even outperformed the major indexes like the FTSE 100 and S&P 500.
Find out more about the CMC Invest ESG Risk Rating Tool