BY MIKE DEVERELL
ESG
Discover the future of investing and the actions Equilibrium is taking to be part of it
The conventional wisdom is that an ethical investment portfolio will underperform over the long term. That’s because an old-fashioned ethical portfolio was based on a series of exclusions. There would often be a whole raft of sectors and companies which could not be included, leaving a much smaller pool of potential investments to select from. The big problem with this type of investing is that “ethical” means different things to different people, and therefore it can be quite niche.
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to Morningstar, over the 10 years ending 31 December 2019, ESG-focused funds outperformed non-ESG funds over most time periods. We believe this outperformance has been driven in part by two factors. Firstly, that ESG funds tend to have more of a focus on new technology which has been a great sector to invest in of late. Secondly, they tend to avoid stocks in things like oil or mining which have experienced many challenges.
Values and purpose
Its newer, slicker cousin is what we call ESG investing, and this is much more mainstream. This uses environmental, social and governance factors to actively reduce portfolio risk whilst also potentially enhancing returns. This means that ESG can (and, in our view, should) be built into everyone’s investment portfolio.
At Equilibrium, everything we do is guided by our core purpose to make people’s lives better and our values of integrity, simplicity, growth and excellence. The investment portfolios we manage are guided by the same principles. The good news is that we don’t have to compromise – we are not giving up growth by acting with integrity.
ESG investing uses evidence-based criteria to identify those companies that are actively having a positive impact on the world, those that are at least trying to avoid doing harm, and those that are having a negative impact.
For example, we have included renewable energy stocks in our portfolios because we think they will enhance returns. The economic case and the environmental argument are pointing in the same direction.
In general terms, we believe that those companies who actively have a positive impact will also be winners for investors. Those that are doing harm will be losers and can present a big risk to portfolios. In fact, according
ESG factors are also crucial in the other key part of investment management, which is managing risk. If a company’s governance is poor, then their management may not always act in accordance with
