Socially responsible investing to suit your ESG principles
As we increasingly make socially responsible choices in our every days lives, there are also choices available for investors. Over the past few years we have seen more and more investors include Environmental, Social and Governance (ESG) investments in to their portfolios and is fully supported by Raymond James, Hitchin.
ESG (or Socially Responsible) Investing
The definition is to use one's ethical principles as the main filter investment selection. ESG investing depends on an investor's views; some may choose to eliminate certain industries entirely (such as gambling, alcohol, or firearms, also known as sin stocks) or to over-allocate to industries that meet the individual's preferences.
A good way to start with an ESG investing policy is to write down the areas you want to avoid as well as where you want to see your money invested. From there you can come up with an asset allocation plan and begin researching individual securities and funds.
- Climate change and carbon emissions
- Air and water polution
- Energy efficiency
- Waste management
- Water Scarcity
- Biodiversity and deforestation
- Gender and diversity policies
- Human rights
- Labour standards
- Employee standards
- Lobbying activities
- Customer satisfaction
- Community relations
- Board composition
- Executive compensation
- Audit committee structure
- Bribery and corruption policies
The earliest recorded instance of ESG investing in America was made by Quakers in the eighteenth century, who restricted members from investing their time or money in the slave trade. Around the same time, John Wesley, a founder of Methodism, preached on the importance of refraining from investing those industries that harm one's neighbour, such as chemical plants, in his speech "The Use of Money."
In the 20th century, ESG investing gained traction based more on people's social views rather than their religious ones. ESG investments tend to mirror the politics and trends of the time. In 1960s and 1970s America, ESG investors focused on those companies and organisations that promoted equality and rights for workers and shunned those that supported or benefited from the Vietnam War.
Starting in the 1990s, ESG investments began to focus heavily on environmental issues, and ESG investors moved away from coal and fossil fuel companies toward those that supported clean and sustainable energy. That trend continues today.
All of our ESG investment strategies strive to integrate environmental, social and governance (ESG) considerations into every investment decision. Our sustainability strategies take this one step further by focusing on long-term sustainability themes as a key driver of the investment process.
To identify funds which consider ESG factors as part of their strategy, we use data from Sustainalytics, through our fund selection tool, Morningstar Adviser Workstation. From this shortlist of funds, we can create an ESG portfolio which has either growth or income objectives and can include both defensive and growth assets.
It doesn't make a difference
In the early days, ESG investing was largely about avoiding companies that were considered to be unacceptable. Increasingly investors are voting together at annual general meetings and engaging directly with company management to enact change.
Performance is lower
Investors may believe performance is lower as there is less choice in terms of selecting investments. The reality is that there are multiple academic studies showing there is no evidence that an ESG portfolio should necessarily underperform, and in fact there are reasons why it might outperform.