15th May 2024

ESG for beginners: The basics you need to know about ESG investing

By Ed Painter

If you’ve come across the phrase “ESG investing” but weren’t sure what it meant or if it’s right for you, read on. You’ll discover what it means and some key considerations if it’s something you want to incorporate into your investment strategy.

ESG investing simply stands for “environmental, social and governance” and involves considering factors from these three pillars alongside financial information when you’re making investment decisions.

It’s an approach to investing that’s been around for decades. Indeed, the initial concept of “ethical investing” is thought to have originated in the Quaker community in the 18th century. However, it’s only since around the 1960s that it started to become mainstream, and it’s gradually gained momentum in the decades since.

It’s an approach that more investors could incorporate into their investment strategy in the future. According to a report in FTAdviser, more than half of investors plan to increase their ESG investments in 2024.

ESG covers a broad range of categories

The term “ESG” covers a huge range of categories that consider how a company operates.

Under the environmental pillar, the following issues might be considered:

  • Carbon emissions
  • Deforestation
  • Waste management.

Social considerations may include:

  • Data security
  • Human rights within the supply chain
  • Customer satisfaction.

Finally, governance might cover:

  • Diversity of board members
  • Executive pay
  • Political contributions.

Factoring ESG issues into your decision-making process could help align your investments with your values. For instance, if you choose Fairtrade items when you’re grocery shopping because you want farmers to receive fair pay, you might consider how a company treats its employees and supply chains when you come to invest.

Some opportunities use other phrases when they’re describing investment criteria. For example, an investment fund that’s focused on reducing its impact on the environment might use “green” or “sustainable”. Or if a business’s practices are scrutinised, it could use “corporate social responsibility” or “CSR”.

Incorporating ESG doesn’t mean overlooking the finances

Incorporating ESG principles into your portfolio doesn’t mean you overlook the financial side of the business or fund. After all, you still want to generate a return on your investment.

You might want to think of your portfolio as having a double bottom line – the returns you receive and the positive impact it could have on the world. So, making ESG part of your portfolio doesn’t have to mean settling for lower returns or adjusting your plans.

In fact, some people argue that ESG investing could deliver greater benefits for investors as companies that have embraced ESG practices are more likely to be forward-thinking and prepared for potential government or economic changes.

Of course, investment returns cannot be guaranteed, and you should still ensure you understand the risk of investing in ESG opportunities and assess if it’s right for you.

You can start ESG investing by buying stocks or using a fund

Much like when you invest without an ESG criteria, you can choose to purchase stocks and shares or invest in a fund.

If you choose to invest in stocks and shares, you’d select which companies you invest in. Understanding if they meet your ESG criteria may be difficult, as there’s no standard way for businesses to report the information. You might also need to consider the individual risk of each stock and how to create a diversified portfolio that suits your needs.

The alternative option is to invest in an ESG fund.

A fund would pool your money with that of other investors and then invest in a range of companies. As a result, using a fund may be a useful way to diversify your investments. The fund will define what its ESG focus is, and how it decides which businesses to invest in.

One thing to keep in mind is that, as ESG is so broad, it might be challenging to find a fund that matches your values exactly. So, you may need to compromise in some areas.

Whichever option you choose, it’s essential you still consider the factors that you would when investing without an ESG focus, such as your investment time frame, risk profile, and how it fits into your financial plan. This can help you balance your ESG goals with your aspirations and circumstances.

Contact us if you’d like to consider ESG factors when investing

Balancing ESG factors and the other considerations you might need to make when investing can be difficult. We’re here to offer support and could work with you to select investments that not only align with your ESG values but support your other goals too.

Please contact us to arrange a meeting to talk about your investment strategy.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.