Does it pay to go green? by Camilla Ritchie, 7IM and Clare Reid, 7IM
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ith the overnight popularity of Greta Thunberg, the devastating wildfires in Australia and Boris Johnson recently setting out his climate change vision, there has perhaps never been more interest and awareness around the impact our actions have on the environment. Indeed, investors are increasingly looking to align their personal values with their investment decisions. And it’s not just millennials who are leading the charge as even the Church of England, which is rarely acknowledged for being ahead of the curve, has an ethical investment advisory group in place to ensure that all its £8.3 billion in assets is invested sustainably. As a result, in just ten years, the number of Environmental, Social and Governance (ESG) investments has more than doubled (see infographic). What exactly is ESG investing? Despite the momentum behind ESG funds, what’s still not immediately clear to many is what is exactly meant by sustainable or ESG investing. At the heart of it, ESG investing involves assessing environmental, social and governance factors in determining what assets to invest in. This means not just looking at investment returns, but assessing how these returns are made. For example, does the investment or the company have a detrimental effect on the environment, on its employees and other stakeholders, and is it governed well? Does it operate in areas generally viewed to be unethical? Or do they present a reputational risk for an investor, such as adult entertainment, gambling or tobacco?
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However, defining ESG investing is not that straightforward as there are different approaches to building a sustainable or ESG portfolio. At one end of the spectrum there is so called ‘dark green ethics’ based investing. This approach ranks companies on their environmental, social and governance scores and invests in those which perform better. Then there’s ‘thematic sustainable investing’ which looks to invest in areas expected to grow faster than the global average and have sustainable characteristics. Finally, there is ‘impact investing’, where the outputs of companies are assessed against the UN Sustainable Development Goals.
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