Martyn Paterson: ESG investing

Martyn Paterson, financial planner at AAB Wealth, discusses the intricacies of ESG investing.

Martyn Paterson: ESG investing

Martyn Paterson

June 5 2020, marked World Environment Day, with World Oceans Day, National Bike Week, and World Day to Combat Desertification and Drought all taking place in the same month. What can they teach us about how we should be investing?

Environmental issues are increasingly big news, with Greta Thunberg, David Attenborough and Extinction Rebellion, amongst others, pushing climate change and pollution into the headlines.

Increased awareness affects everything from how we shop to how we recycle, and it has an impact on how we invest too.

It was reported by FT Adviser back in 2018 that 52% of millennial investors are already investing sustainably.

What is ESG investing?

ESG investing means basing your investment decisions on Environmental, Social, and Governance factors.

This could mean avoiding companies engaged in gambling, or the sale of tobacco or alcohol. Conversely, it might mean actively seeking out those companies known to be environmentally responsible.

Environmental investing means choosing where to place your money based on factors like a business’ response to climate change, or its approach to renewable energy or pollution.

A company with an awareness of their environmental impact and an understanding of sustainability issues will be more likely to attract ESG investors.

It’s not just environmental issues that govern a company’s ESG credentials. Social factors will also be a consideration.

These could include staff working conditions, fair wages, and how a company situates itself within its community.

Governance concerns the internal practices of a company. Are shareholders elected democratically? Is their accounting transparent? Are their practices legal, as well as ethical?

The future of ESG

We all do our bit for the environment – recycling, turning off lights, cutting back on plastic – but we still invest for one main reason: returns.

ESG was once thought to mean putting your principals before your desire to make money, but that doesn’t have to be the case.

A UK Investor Magazine report predicts 173 per cent growth and a “market worth £48 billion by 2027”.

It is growth based on changing public perceptions around sustainability, but also on investment returns.

Morningstar recently reported that “41 out of 56 of their ESG indexes have outperformed their non-ESG equivalents since inception”.

Elsewhere sustainable banking firm Triodos, confirm that their Global Equities Impact Fund returned 78.3 per cent over the five years up to September 2019.

As we celebrate World Environment Day, we acknowledge the responsibility we all have for the planet, and each other.

Increased awareness of ESG issues has brought a rise in ethical investment. It’s an opportunity to place your money where your beliefs are, whilst also seeing potentially great returns.

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