In recent years, investing in positive causes has become more mainstream; gone are the days of ethical investments being limited to a few do-gooder (we suppose you could say ‘altruistic’) individuals. Today, ESG funds, which stands for Environmental, Social and Governance, are on the rise thanks to increasing awareness on the ecological and political state of our world.
A new approach
Traditionally, the term ‘ethical investing’ referred to a strategy more concerned with exclusions; avoiding harmful industries such as tobacco, alcohol, arms, gambling or adult entertainment, for example. An individual could request an avoidance of such industries but that didn’t necessarily mean that their investments would be used to further positive initiatives.
However, as the ever-important concept of sustainability continues to permeate our lives, many people are now wanting to adopt a more hands-on approach in ensuring their investments are used to promote a healthier environment and fairer society. For an increasing amount of investors, making money at any cost does not sit comfortably with them.
A shift in focus
ESG funds, as the name would suggest, tend to concentrate on areas such as: renewable energy; resource efficiency; waste management; human rights; gender equality; diversity; labour standards; and anti-bribery and corruption, although this is not an exhaustive list. An increasing number of governments may commit to net zero carbon pledges ahead of COP26 later this year, so much so that approximately 50% of global GDP is now being driven by this shift to a greener world[1]. This will in turn have an effect on the number of sustainable funds available that are geared towards this transition.
The global pandemic has also highlighted a need for greater investment in health and hygiene so there may also be a growth in businesses searching for investment in these areas in years to come.
While companies associated with green or social causes may have been stigmatised with providing comparatively undesirable returns in the past, a shift in attention on these areas means that ESG funds are now capable of providing healthy returns while giving investors comfort that their money is being spent on promoting a better world for all.
Assessing sustainability
There are certain ESG criteria that a company must meet for an investment management firm to deem it a sustainable option for their clients. Currently, there is no standardised approach to awarding ESG status but some regulatory bodies, such as the Sustainability Accounting Standards Board are working on this[2].
Brooks Macdonald, who are the investment manager to the TM Brunsdon OEIC, have a structured approach when it comes to researching ESG funds[3]. The company’s due diligence process includes in-depth analysis of opportunities to find those that align best with its two ESG strategies of ‘Advance’ and ‘Avoid’. Both quantitative and qualitative data are assessed and only when the fund is deemed appropriate will it then be used going forward. Here at Brunsdon Financial, we are aware that the topic of ESG is not a trend; for a growing number of our clients, it’s where the future of their investments lie. We have already taken proactive steps to reduce our own negative impact on the world. Several staff members now have either electric or hybrid cars, and to support this we have installed an electric charging point in our office car park. We are also looking at ways to continue reducing emissions across our investments; this is a work in progress and something we look forward to sharing details about later on.
