Chase de Vere guide to ESG investing
Chase de Vere guide to
ESG investing
Making an impact with your investments
Making an impact with your investments
Environmental, Social & Governance (ESG) investing is a significant development in the investment world.
More and more people wish to see their personal values reflected in their investment portfolios and this can be met by ESG investing. If you would like to align your investment choices with your social, environmental and moral beliefs, then ESG investing is something you should consider.
In this short guide we’ll take you through how this area of investment is developing; why we think it is becoming more important; and explain some of the terminology and processes used to help you understand all about ESG investing.
Environmental, Social & Governance (ESG) investing is a significant development in the investment world.
More and more people wish to see their personal values reflected in their investment portfolios and this can be met by ESG investing. If you would like to align your investment choices with your social, environmental and moral beliefs, then ESG investing is something you should consider.
In this short guide we’ll take you through how this area of investment is developing; why we think it is becoming more important; and explain some of the terminology and processes used to help you understand all about ESG investing.
What is ESG?
What is ESG?
ESG stands for environmental, social and governance. These three factors are used to identify those companies that are applying these principles within their everyday business in order to become the best, sustainable and responsible companies in their industry.
ESG stands for environmental, social and governance. These three factors are used to identify those companies that are applying these principles within their everyday business in order to become the best, sustainable and responsible companies in their industry.
Environmental
Environmental
The criteria used to evaluate this can range from a firm’s carbon footprint to examining a company’s approach to managing pollution, reducing the use of single-use plastic and helping with conservation. Fund managers can exclude companies that fail to meet certain criteria in this area or preferably they can engage with them to make them perform better.
The criteria used to evaluate this can range from a firm’s carbon footprint to examining a company’s approach to managing pollution, reducing the use of single-use plastic and helping with conservation. Fund managers can exclude companies that fail to meet certain criteria in this area or preferably they can engage with them to make them perform better.
Social
Social
Social factors broadly encompass a company’s business and societal relationships, such as its working conditions and regard for employee health and safety as well as its impact on local community interests and projects.
Social factors broadly encompass a company’s business and societal relationships, such as its working conditions and regard for employee health and safety as well as its impact on local community interests and projects.
Governance
Governance
These criteria are generally fundamental to a firm’s operations. This involves assessing the company’s use of accounting standards, gender and ethnic diversity and equality, as well as transparent practices and managing conflicts of interest.
These criteria are generally fundamental to a firm’s operations. This involves assessing the company’s use of accounting standards, gender and ethnic diversity and equality, as well as transparent practices and managing conflicts of interest.
ESG vs
Ethical investing
ESG vs
Ethical investing
While the evolution of ESG investing can be traced back to Ethical investing, it must be remembered that Ethical investing is a form of ESG investing, and although both methods share a lot of common ground, there are differences. This is mainly down to positive and negative screening.
Positive and negative screening
Positive and negative screening
Ethical investing excludes a wide range of industries and companies due to the business areas they operate in. Investing in this way has a very long history in the UK going back to the 19th century with religious orders, such as the Quakers and Methodists, who sought to exclude investing in ‘sin stocks’ such as tobacco and alcohol.
Excluding these ‘sin stocks’ laid the foundations for Ethical and, in turn, ESG investing. However, ESG investing does not focus on negative screening preferring to focus on positive screening and seeking out and rewarding those companies that are acting as a ‘force for good’.
For example, although ESG investing will exclude certain stocks or sectors of the market, such as tobacco, fund management teams will seek out companies they consider are providing a positive contribution to society and the environment and which are being run in a transparent, accountable and equitable manner.
Excluding these ‘sin stocks’ laid the foundations for Ethical and, in turn, ESG investing. However, ESG investing does not focus on negative screening preferring to focus on positive screening and seeking out and rewarding those companies that are acting as a ‘force for good’.
For example, although ESG investing will exclude certain stocks or sectors of the market, such as tobacco, fund management teams will seek out companies they consider are providing a positive contribution to society and the environment and which are being run in a transparent, accountable and equitable manner.
Shades of green
Shades of green
In the early days of ethical funds, the focus was on exclusions and which company shares were screened out due to set criteria. This saw funds classified on what ‘shade of green’ they were. Such an approach can be applied to ESG and Ethical investing.
Light green (ESG investment funds)
Light green (ESG investment funds)
- Relatively light touch approach, with more relaxed or fewer investment exclusions, if any, for a company share to be included in a fund portfolio.
- Relatively light touch approach, with more relaxed or fewer investment exclusions, if any, for a company share to be included in a fund portfolio.
Dark green (Ethical investment funds)
Dark green (Ethical investment funds)
- Progressively take into account a wide range of exclusions and have strict standards for implementation prior to inclusion within a fund portfolio.
- Progressively take into account a wide range of exclusions and have strict standards for implementation prior to inclusion within a fund portfolio.
The more ethical considerations that are screened out leads to more company shares being excluded, which makes it more difficult to find eligible investments and therefore reduces diversification.
A brief history of Ethical and ESG investing
A brief history of Ethical and ESG investing
The origins of Ethical investing can be traced back to religious groups such as the Quakers and Methodists, who sought to exclude profiting from ‘sinful stocks’ such as alcohol, gambling and tobacco.
The origins of Ethical investing can be traced back to religious groups such as the Quakers and Methodists, who sought to exclude profiting from ‘sinful stocks’ such as alcohol, gambling and tobacco.
Charities and some philanthropists adopted this exclusionary method of investing to ensure that their investments were not at odds with their charitable or personal beliefs.
Charities and some philanthropists adopted this exclusionary method of investing to ensure that their investments were not at odds with their charitable or personal beliefs.
1971 – The Pax World Fund was launched in the US inspired in part by anti-war activists in response to the Vietnam War.
1971 – The Pax World Fund was launched in the US inspired in part by anti-war activists in response to the Vietnam War.
1983 – EIRIS (Ethical Investment Research Services) was established as the UK’s first independent research service for ethical investors.
1983 – EIRIS (Ethical Investment Research Services) was established as the UK’s first independent research service for ethical investors.
1984 – Friends Provident launch the first ethical fund in the UK, the Friends Provident Stewardship Fund.
1984 – Friends Provident launch the first ethical fund in the UK, the Friends Provident Stewardship Fund.
The increase in global news broadcasting starts highlighting to far wider audiences the environmental impact of deforestation and human rights abuses by companies within the supply chain.
The increase in global news broadcasting starts highlighting to far wider audiences the environmental impact of deforestation and human rights abuses by companies within the supply chain.
End of the 1990s – approximately £3.3 billion invested in the UK across 50 ethically focused funds.
End of the 1990s – approximately £3.3 billion invested in the UK across 50 ethically focused funds.
2000 – UN Global Compact is founded to encourage businesses worldwide to adopt sustainable and socially responsible policies. The rise of social media brings more issues to people’s attention, leading to a growth in ethical consumerism.
2000 – UN Global Compact is founded to encourage businesses worldwide to adopt sustainable and socially responsible policies. The rise of social media brings more issues to people’s attention, leading to a growth in ethical consumerism.
2015 – 17 Sustainable Development Goals are set by the UN covering key global criteria including no hunger, reducing inequality and climate action.
2015 – 17 Sustainable Development Goals are set by the UN covering key global criteria including no hunger, reducing inequality and climate action.
2015 – The Paris Agreement is drafted bringing the impact of climate change and carbon emission to the forefront globally, with environmental issues becoming central concerns for numerous nation states and international companies.
2015 – The Paris Agreement is drafted bringing the impact of climate change and carbon emission to the forefront globally, with environmental issues becoming central concerns for numerous nation states and international companies.
According to the Financial Times the UK Ethical / ESG Fund market size was over £16 billion in 2018 and growing.
According to the Financial Times the UK Ethical / ESG Fund market size was over £16 billion in 2018 and growing.
ESG funds captured $51.1 billion of net new money from investors in 2020, a record and more than double the prior year, according to Morningstar.
ESG funds captured $51.1 billion of net new money from investors in 2020, a record and more than double the prior year, according to Morningstar.
United Nations Sustainable Development Goals (UN SDGs)
United Nations Sustainable Development Goals (UN SDGs)
The UN SDGs are 17 global goals established in 2015 to provide the blueprint to achieve a better and more sustainable future for all. The goals address key global challenges related to poverty, inequality, climate, environmental degradation, prosperity and peace and justice.
The goals interconnect and the intention is that each goal is achieved by 2030.
Many ESG fund managers reference their fund portfolio against the United Nations Sustainable Development Goals (UN SDGs), analysing which stocks they hold against which UN SDGs they align with.
For example, a renewable energy stock within an ESG fund could naturally align itself with both UN SDGs 7 and 13 (renewable energy and climate action).
However, it could also indirectly align to UN SDGs 14 and 15 (life on land, life below water) as the provision of renewable energy should lead to less fossil fuel exploration on land and sea and, in turn, pollution.
The goals interconnect and the intention is that each goal is achieved by 2030.
Many ESG fund managers reference their fund portfolio against the United Nations Sustainable Development Goals (UN SDGs), analysing which stocks they hold against which UN SDGs they align with.
For example, a renewable energy stock within an ESG fund could naturally align itself with both UN SDGs 7 and 13 (renewable energy and climate action).
However, it could also indirectly align to UN SDGs 14 and 15 (life on land, life below water) as the provision of renewable energy should lead to less fossil fuel exploration on land and sea and, in turn, pollution.
Is ESG investing for me?
Is ESG investing for me?
ESG investing is not for everyone. People’s values vary widely and what one person may see as a cause for concern may be disputed by another. Incorporating some ESG funds as part of your overall investment strategy could be considered even without an ethical motive, on the basis of diversification, risk management and portfolio performance.
After reading this guide you may have a clearer idea about this rapidly growing area of investment and the kind of approach you would like to adopt.
In essence you will have to consider if:
After reading this guide you may have a clearer idea about this rapidly growing area of investment and the kind of approach you would like to adopt.
There are a number of areas you specifically don’t want to invest in
Your option here could be a negatively screened Ethical Portfolio, which will exclude the areas that you do not wish to invest in, although you will have to bear in mind that the more areas you want to exclude the smaller the investment universe becomes. This could increase risk due to a lack of diversified investment options.
There are a number of areas you specifically don’t want to invest in
Your option here could be a negatively screened Ethical Portfolio, which will exclude the areas that you do not wish to invest in, although you will have to bear in mind that the more areas you want to exclude the smaller the investment universe becomes. This could increase risk due to a lack of diversified investment options.
There are no areas you specifically want to explicitly exclude
Your option here could be to examine a positively screened ESG Portfolio, which will not specifically exclude areas of investment but will consider funds for their environmental and social impact, especially those that look to provide solutions to problems such as healthcare, clean water and carbon emissions.
There are no areas you specifically want to explicitly exclude
Your option here could be to examine a positively screened ESG Portfolio, which will not specifically exclude areas of investment but will consider funds for their environmental and social impact, especially those that look to provide solutions to problems such as healthcare, clean water and carbon emissions.
Planning your ESG investment strategy
Planning your ESG investment strategy
Chase de Vere can guide you independently through the options available to ensure that your investment strategy aligns both with your financial goals and your moral philosophy.
Speak with your financial adviser, call us on 0345 300 6256 or visit www.chasedevere.co.uk to request an appointment.
Please note: investments can go up and down in value, so you could get back less than you put in.
Chase de Vere can guide you independently through the options available to ensure that your investment strategy aligns both with your financial goals and your moral philosophy.
Speak with your financial adviser, call us on 0345 300 6256 or visit www.chasedevere.co.uk to request an appointment.
Please note: investments can go up and down in value, so you could get back less than you put in.
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Registered office: 60 New Broad Street, London, EC2M 1JJ.
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