January 14, 2022

ESG: What Is It And Why Has It Become So Popular?

ESG. You may have heard the term but perhaps not known what it is or what it stands for. Our investment team take a closer look!

ESG. You may have heard the term but perhaps not known what it is or what it stands for. You certainly wouldn’t be alone. So in this article we’ll explain all you need to know about this way of investing, and why it’s the fastest growing area in the investment world right now.

ESG investing - Environmental, Social, Governance

That’s the bit about what ESG stands for out of the way, but what exactly does it mean? ESG investing, which is also known as responsible investing, or sometimes sustainable, socially-responsible or ethical investing, is a way to invest by looking beyond traditional financial analysis. So rather than looking at things like a company’s profitability and sales, ESG investors also consider such issues as carbon emissions, workplace diversity, and how risks in a company are managed.

The point of this isn’t to be an overly virtuous ‘goody-two-shoes’. Instead it’s to evaluate a company in more depth and try to better identify opportunities and avoid risks. Ultimately, ESG investing is still about aiming for strong returns – it is investing after all – but it’s with companies that are doing less harm and more good and so making a positive difference to the world.

Winning the popularity stakes

ESG is not a new concept. It’s been around for many years but was only given the ESG label in fairly recent times. With the increasing focus on environmental and ethical issues though, its popularity has boomed lately. It’s now attracting more investment than any other area in the world. It’s predicted ESG investments will reach over $50 trillion by 2025, or about a third of all the money invested globally.

Over 4,000 investment firms, including many of the biggest on the planet, have pledged to commit to ESG investment by signing up to the United Nations Principles of Responsible Investing (PRI). So while there are some accusations of ESG being a fad, we think it’s here to stay, which is why Skybound Wealth is a PRI signatory too.

Does ESG investing actually work?

With the proliferation of social media and news at your fingertips, companies are now under the spotlight far more than they ever were. Consumers are becoming increasingly sensitive to how businesses operate, and this is influencing their buying decisions. So if you’re going to invest in a company, it makes sense to understand whether it’s at risk of negative press, reputational damage or litigation.

On the flip side, investment opportunities can be found by identifying which businesses are taking advantage of the increasing expectations placed on them, such as being more eco-friendly or treating employees and local communities well. None of this guarantees a company will make a good investment, but it helps build a better overall picture of whether it has a bright or challenging future ahead.

Will ESG investing hold back my returns?

Some people may assume that investing with a more responsible approach will be at the expense of growth. In recent years, however, that’s been the opposite of reality – ESG returns have actually been a little better than the broad traditional way of investing.

Naturally ESG tends to reduce or even completely avoid exposure to industries such as oil and gas, mining and tobacco, among other controversial areas. These sectors have been among the worst performers in recent years, so by having low-to-no investment in them that’s been to the benefit of ESG investors.

It’s important to realise this is unlikely to always be the case though. No investments stay at the top or bottom of the performance charts forever. The point is, however, that real-world returns have shown ESG investing certainly doesn’t automatically hamper your returns, and could even potentially give them a boost.

Past performance is not a guide to the future. Source: FE Analytics to 31 December 2021.

How can I invest in ESG?

With the explosion in popularity of ESG investing, it’s no surprise that there are a growing number of funds that cater to this. ESG analysis can be trickier than traditional investment approaches though, and many funds have short track records, so there’s not as much to analyse. This can make knowing which ESG funds to invest in challenging.

Fortunately though, our Responsible Growth portfolios make ESG investing simple and convenient. We do all the research and build them using a blend of different ESG funds. Like all our portfolios, they aim to deliver strong long-term returns, but with zero or significantly reduced exposure to fossil fuels, tobacco, weapons, mining, alcohol, pornography and gambling.

If you’d like to know more about our Responsible Growth portfolios or anything else about ESG investing, please contact your Skybound Wealth advisor or your local Skybound Wealth office.

Written By
Nikita Maxwell
Investment Analyst

Past performance is not a guide to future returns. Investment in securities involves the risk of loss and the advice herein cannot be construed as a guarantee that future performance will be reflective of past returns.

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