ESG & Sustainable Investing
What Is ESG Investing?
Economic – Social – Governance is what constitutes ESG. The principles of which are used in the investment industry and in the process of investing to quantify how a company acts, the effects it has on its surrounding environment and its employment of human capital.
How is ESG implemented into the investment process?
The investment process starts with an assessment of the client’s risk profile and time horizon. Once these elements are accounted for, ESG factors are integrated into the process when looking at which sectors, funds and stocks to invest in. No specific sectors are excluded as we are not an ESG centric investment advisory service, however it is essential that we are ESG aware and factor that into our investment decision process.
We then screen funds and companies with ESG ratings with our criteria using a bottom up analysis. This filters funds and companies in order to then make sure that they are not greenwashing, and actually are as sustainable in their ESG practices as they say they are.
After we have conducted a screening, we then assess the performance in comparison to a benchmark or sector to get an accurate comparison. Company valuations are analysed so as to establish whether they are trading at a fair price and if not, why that that is. Finally, technical analysis is conducted in order to find an entry point into the market and assess the trends of the stock price.
ESG funds; companies engaged in ESG practices.
ESG Ratings; ESG criteria; Bottom-up analysis; Positive & negative screening.
Performance (Sector and benchmark); Peer ranking; company valuation; Price levels; technical analysis
As world economies shift to putting a higher focus on achieving sustainability targets, ESG factors are placed higher on the agenda when assessing an investment. Tighter and more stringent measures are put into place when assessing companies scores which can be broken down various factors and looked at separately to fully understand these scoring systems. Through having a full understanding of the factors which make up the quantifiable ESG scores, our Investment Team are able to make more informed decisions when choosing what to invest in.
Why is ESG Important?
Even if clients aren’t particularly environmentally conscious, the factors E, S & G are still important to take into account when making investment decisions. These factors have always been central to investment managers decision making processes as the three factors are a good assessor of risk. For instance, a company could have a poor governance score, which could be down to mismanagement and thus affect the decisions on whether a company is a sound investment or not.
Integration of ESG are important to look at and differ for each business and industry. For example, a company involved in the production of consumer goods will be assessed by all of the ESG factors, however a higher importance will be placed on the social aspect in how employees are treated and where the product is made. This is due to increasing concerns over workers’ rights and labour laws.
When managers assess ESG in the investment process, it is therefore important for them to figure out which of the factors will pose the biggest risk to that company and then focus in on that factor specifically. This enables managers to place a higher importance of which risks pose the highest threat enabling managers to better use the ESG framework in decision making.
As we seek to transition into a cleaner and more environmentally friendly world, investment in sustainable and innovative solutions is crucial.
Over the next twenty years, countries across the planet seek to achieve the Paris Climate agreement and United Nations Sustainable Development Goals. Through investments into businesses which are seeking to achieve these objectives we would be acting responsibly as investors. The term responsible investing has been born out of this objective.
Through investing in agricultural technologies, green energy and electric vehicles for example we are able to generate returns at the same time as working towards a better future for all in preserving the world we live in. Sustainable innovative technology solutions and other environmental efficiencies present opportunities to change the current path of climate change so that the world will be a healthy place ripe for generations to come.