Responsible Investing and ESG

Asset managers and their clients are increasingly incorporating environmental, social and governance considerations – collectively known as ESG – into their investment decisions. This reflects the spectacular rise of responsible investing – an investment ethos that delivers benefits beyond the bottom line and recognises that modern-day investment should be a matter of long-term ownership and sound stewardship.

But what does responsible investing really mean?

It is arguably the most important investment trend of recent decades. The idea is not entirely novel, but it has never been as sophisticated, as popular or as effective as it is today. Once a “nice-to-have”, it is now frequently seen as a “must-have”. It is rapidly transitioning from the margins to the mainstream and is increasingly regarded as a vital component of investment thinking.

The term “responsible investing” encompasses products and services that reflect a major shift in the focus of businesses, entities and society in general. We might usefully think of this shift as a move from the long-established model of shareholder capitalism, in which success is measured in profits alone, to what is sometimes known as stakeholder capitalism, in which the desire for attractive returns goes hand in hand with a determination to serve the greater good.

Many investors now attach a growing importance to environmental, social and governance issues. As noted in the introduction to this article, these considerations are collectively known as ESG. Let’s consider the three components.

Environmental

Environmental considerations tend to dominate many investors’ ESG thinking. This is unsurprising, given the wide-ranging effects of climate change – which, even in the era of COVID-19, remains the biggest existential threat of our age. In assessing an organisation’s environmental performance, an Investment House might take into account factors such as the use of natural resources, supply-chain impact and policies around pollution and waste.

Social

Social considerations cover how an organisation interacts with stakeholders, clients, employees, suppliers, communities and, vitally, society as a whole. It has traditionally been the least prominent of ESG’s three elements, although it is now gaining ground. Factors such as workforce and community relations, human rights and polices around equality are considered.

Governance

Governance considerations might reasonably be thought of as the bedrock of ESG, in so far as an organisation’s commitment to Environmental and Social must to some extent stem from its commitment to Governance. Management, board composition, auditing practices, regulatory concerns, compensation and corruption are among the factors taken into account here, as is the overarching theme of corporate social responsibility. Governance is perhaps the fundamental yardstick of how an organisation aligns its own interests with those of multiple stakeholders.

In summary then, responsible investing seeks to combine investment performance with objectives that extend beyond the bottom line. It is about “doing the right thing”, encouraging sustainability and contributing to positive, lasting change.

If you would like to discuss this topic in more detail, and consider the position of your own portfolio, please do contact us.