What is ESG (environmental, social and governance) investing?
ESG (environmental, social and governance) investing, put very simply, is about buying shares in companies that differentiate themselves from others in the way they think about the following three issues:
- Environmental ( E ) – this is about helping our planet. So, a company might offer a product or service that solves or helps alleviate an environmental challenge. Examples might include cleaner forms of electricity or making things with more reusable materials.
- Social (S) – this is about helping people. A company might offer a product or service that solves or helps alleviate a societal challenge. Examples might include making education more accessible online, protecting people’s personal data or even providing healthier food.
- Governance (G) – this is about company shareholders being well looked after and protected. So, this area concerns a company’s leadership, executive pay, audits, internal controls and transparency amongst others.
Is ESG an attractive approach for investors?
Ultimately, ESG provides a way of responsible investment without compromising on returns, as high-scoring ESG companies which behave well in all these areas are more likely to be successful and sustainable businesses over the long term. In fact, there is a lot of evidence that companies that meet high ESG standards tend to outperform those that don’t, by a significant margin. And we’ve certainly seen the opposite for companies with low ESG standards. For example, businesses that have supported apartheid in South Africa, dealt in chemical weapons or cheated over emissions tests have all seen their share prices fall.
What is the difference between ESG (environmental, social and governance), ‘ethical’ investing and ‘impact’ investing?
There are a raft of different approaches to responsible investing:
- Traditional exclusionary methods (also known as ethical or socially responsible) usually focus on ‘screening out’ companies with links to controversial areas like alcohol, tobacco, gambling, firearms, pornography or animal testing
- Newer, more inclusive approaches attempt to rank companies according to a variety of factors, in order to assess how sustainable they are when compared with their peers (sometimes referred to as sustainable or ESG investing)
- At the other end of the spectrum, investors select companies they believe will benefit from a global move to a more sustainable planet, such as electric vehicles or clean energy (this can be called thematic, green or impact investing).
ESG is just one of numerous terms in the responsible investment space, and the real differentiator between them is the emphasis placed on their financial performance objective. At the extreme end, there are businesses and funds that are purely philanthropic in nature, with little thought given to the rate of return for investors.
At Canaccord Genuity Wealth Management, we actually consider a combined approach – so alongside our ESG criteria there’s an exclusionary element to our ESG Portfolio Service (we have zero exposure to a number of ‘sin’ sectors such as tobacco, gambling and pornography), as well as an impact element - so the ESG funds we choose are also making a demonstrable positive impact on the world, as well as offering a financial return. We also take a thematic approach to ensure we align with the UN’s Sustainable Development Goals - 17 goals that the UN has set out for its member states to achieve by 2030 for peace and prosperity for people and the planet.
How can investors make sure they really are investing responsibly via ESG?
ESG categorisations can be interpreted in various ways which can make it difficult for investors with specific ethical requirements. So, you could end up, for example, investing in a sugary drinks manufacturer that happens to have a good policy on recycling its products; it may score highly on the ‘E’- but are sugary drinks necessarily good for society? Of course, the area of responsible investing can be very subjective – what matters to one individual may be less important to another.
And while there’s been a big movement around ESG which is very positive, it’s also sadly brought opportunists along who market themselves as ESG businesses or funds but aren’t. This is often referred to as ‘greenwashing’ and something any responsible investor would want to avoid.
How can ESG investors avoid greenwashing?
The key is to look for businesses with products or services that are truly addressing the world’s global problems. Rather than, for example, a company that might be doing something completely unrelated to the environment that has good environmental policies. We believe greenwashing is quite a big risk so investors need to do their homework:
- Look out for things like ‘highest ESG-rated companies by sector’ - do you really want to invest in a big oil company that scores highly on governance for example?
- If you’re investing in a fund – look at the fund’s voting policies - if a fund is telling you it cares a lot about environmental risk, what has its track record been on this? What has its voting policies on environmental issues been?
- Challenge fund manager policies - if an asset manager is claiming theirs is an ESG fund and that they encourage their businesses to be progressive, then you are within your rights to challenge them on that and ask them how they do it. How do they engage with companies about their water usage for example? Or what’s their policy for speaking to directors about strategies to minimise waste in their operations or production processes? What is the fund or company’s own environmental record?
What matters to us as ESG investors trying to generate good returns for our clients is how data is used. A bank scoring well on water resource usage is less useful than a drinks manufacturer scoring well in the same area. Where this adds real value is in highlighting risks early that may be ignored while the company is a market ‘darling’.
With all these different criteria in play, expertise is vital when crafting an ESG portfolio. With our specialist ESG Portfolio Service, we will aim to do all the investigating and research to find suitable ESG funds, and then monitor them continually on your behalf. The underlying funds identified by our filter have a history of integrating ESG standards into their decision-making and demonstrate a long and successful track record of outperforming their ESG and non-ESG competitors. The fund managers we select for inclusion in our ESG portfolios are also aligned to the UN’s Sustainable Development Goals and the themes we are trying to target. We currently have 15 themes in our ESG Portfolio Service ranging from clean energy to waste technology to .
We believe that responsible investing isn’t just good for the community and environment – it can also be profitable for you. If you would like more information about investments to reflect your personal values, or if you represent a charity with restrictions affecting the companies you can invest in, visit the ESG Portfolio Service page.
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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance. This is not a recommendation to invest or disinvest in any of the themes or sectors mentioned. They are included for illustrative purposes only.
This video is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.
The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.
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Investment involves risk and you may not get back what you invest. It’s not suitable for everyone.
Investment involves risk and is not suitable for everyone.