There is increasing talk about the type of investing which considers environmental, social impact, and good governance (ESG) factors when making investment decisions. To understand if it is all just hype or whether its an important part of the future of investment let’s explore the topic.
What is it?
ESG factors can include things like a businesses’ carbon emissions, its labour practices, and its board diversity.
There are a number of reasons why investors might choose to invest with an ESG focus. For instance, some investors view ESG investing as a way to make a positive impact on the world believing that by investing in businesses that are committed to sustainability and social responsibility, they are helping to promote positive change.
Other investors believe that ESG investing can lead to better financial returns. They argue that companies that are committed to ESG factors are more likely to be resilient in the long term and outperform their peers.
Here are some of the most common ESG factors that investors consider:
• Environmental factors: These include things like a company’s carbon emissions, its water usage, and its waste disposal practices.
• Social factors: These include things like a company’s labour practices, its diversity and inclusion policies, and its commitment to human rights.
• Governance factors: These include things like a company’s board composition, its executive compensation practices, and its shareholder rights.
It is important to note that like any investment function, ESG investing is not without its risks. ESG factors can be difficult to measure, and there is no guarantee that ESG investments will outperform traditional investments in the future. Additionally, people will define their ESG criteria differently – some will consider a mining company by definition breaches environmental principles, whereas others will hold a view that mining activities to source resources which are used in the manufacture of items to generate renewable energy is satisfactory.
Should you Invest in ESG?
If you are considering investing in the ESG sector it is important to understand the risks involved. ESG investing is a relatively new field, and there is still a lot that we do not know about how ESG factors affect investment performance. It is also important to remember that ESG investing is not a guarantee of financial success.
There is some evidence to support the claim that ESG investing can lead to better financial returns. A study by the Global Sustainable Investment Alliance found that ESG-aligned investments outperformed conventional investments by an average of 3.2% per year over the past 10 years. However, it is important to note that this is just one study, and more research is needed to confirm these findings.
Some of the benefits proponents of ESG investing highlight include:
• helping investors make a positive impact on the world. By investing in companies that are committed to sustainability and social responsibility, you are helping to promote positive change.
• It may lead to better financial returns. There is some evidence to suggest that ESG-focused investments can outperform the market as a whole.
• It may help you reduce your risk. Companies that are committed to ESG factors may become more resilient in the long term.
How to Invest?
There are a number of different ways to invest in the ESG sector. Most directly, investors can invest in businesses via companies listed on a stock exchange or via a managed fund which specifically focuses on ESG investing. Each will have its merits and disadvantages depending on what the investor seeks. For example, buying into one or a few companies on a stock exchange can introduce risk of over-exposure to a sector which is still new and developing and has demonstrated volatility at times.
Whereas investing via managed funds an investor accesses a broad, diversified portfolio of holdings giving wide exposure and potentially limiting risk.
In addition to our traditionally styled diversified portfolios, Holzworth Partners group offers a series of ESG focused portfolios. These portfolios, managed by our wholly owned investment manager, IndexInvest, give access to Australian and global markets, and covering all major asset classes. This portfolio has been running for several years delivering a consistent return for investors.
If you wish to express your investment outlook with an eye to the ESG sector, contact us to discuss how. The opportunities extend to superannuation and retirement money, and ordinary investment money.