Financial planning / Investments

What to consider when ESG investing

ESG investing is becoming increasingly important to a wide range of investors. Charlie Buxton, our Portfolio Manager, looks at some of the key developments likely to impact ESG investing over the coming months.

The concept of building Environmental, Social and Governance (ESG) factors into investment is resonating with more and more people. Even after Covid-19 struck and markets initially struggled, investment in sustainable funds performed well, and in the third quarter of 2020 the European sustainable fund market reached a milestone of almost £800 billion in Assets Under Management.

Momentum looks set to continue, and if you’re interested in incorporating this approach into your portfolio there are a few key themes to be aware of.

Climate change

This topic is high on the agenda for many businesses and individuals. The impact of a year of lockdowns and home working has only highlighted how our collective behaviour has affected the environment. Air travel has dropped significantly, sharpening the focus on how we all live and work. Globally, it’s accepted that a low-carbon economy can’t now be ignored, and this will likely become a key focus for companies, who increasingly now appreciate the need for greater transparency with shareholders.

Social issues

Recent events have meant that topics including diversity, inclusion, employee engagement and skills development have become more relevant than ever before. The pandemic has again intensified inequalities; women account for around two-fifths of the global labour force but have experienced more than half of the total job losses caused by the pandemic. As a result, companies are increasingly aware of their need to be more accountable for the people they are responsible for – from employee wellbeing and workforce diversity, to all those who are impacted across their supply chain. Furthermore, investors are also keen to understand how prepared companies are for shifts in the way we all work and the issues which future pandemics may create, such as more redundancies or redeployment of workforces.

ESG investing becomes mainstream

The past year has been a pivotal one for ESG. Although the concept has been one which investors have been aware of for some time, it’s now a much more mainstream and accepted approach. In 2020 more than 250 funds in Europe repurposed themselves to include ‘sustainable directives’ to make them a better fit for investors. Funds have shifted their strategies to incorporate more sustainability and a large proportion have even changed their names to reflect their revised credentials. As policy and regulations tighten, and with Europe’s goal of being carbon-neutral by 2050 in mind, ESG factors will form the cornerstone of more investment decisions.

Governments will also be keen to help companies rebuild after the pandemic and to offer additional support to those tackling a range of ESG issues. There’s also strong investor sentiment for those companies who are transitioning to better business practices.

As we move past the pandemic, there’s a renewed sense that the time is now for ESG investment; there’s certainly a clear focus on ESG priorities for companies and investors which looks set to continue throughout 2021 and beyond.

If you would like to discuss any aspect of ESG investing in more detail, please get in touch.