I’ve repeatedly defined investing as the process of purchasing assets with your money, with the intention that they appreciate in value and grow your wealth over the long term. It’s important to see investing in this way, investments are purchases and therefore you have some licence over how your money is being used. Remember there is power in your purchase, and you don’t need to spend money in places that fundamentally oppose your personal values – in the pursuit of profit.
When choosing your investments, there are many options available to you which means you don’t have to buy into companies you don’t like. If you think this doesn’t apply to you, remember, if you have a workplace pension you are already an investor. This is why you should know about ESG investing. We have drafted in Kathryn Oglethorpe from Ocean Bottle (a sustainability pioneer taking on the fight to save our planets oceans) to give us some more insight on ESG investing in this article.
Niaz Azad, Co-Founder at Millennial Money UK
Most of us will have never heard of the initialism ESG - and those of you who already know what it stands for have probably had some exposure to the world of investment banking.
Otherwise known as “Sustainable” or “Socially Responsible” Investing, ESG provides a metric to assess how sustainable an investment portfolio is against Environmental, Social and Governance factors. As Niaz mentioned, its important to understand that when it comes to investing there is power in your purchase, and where you decide to put your money.
Let’s take a look at Rakel. Rakel has been a nurse for nearly 15 years and has been making monthly contributions to her pension that are matched by her employer. On a daily basis Rakel witnesses the devastation caused by smoking on her patients - the issue is also close to her heart as she herself has lost a parent to lung cancer. Imagine her horror when she discovers that her pension for the past 15 years has been investing her hard-earned money into the tobacco industry.
Or how about Jesse. He’s dedicated his life to campaigning for the conservation of our planet and her natural resources. He even headed up an advertising campaign to highlight the deforestation crisis in Borneo and the loss of endangered Orangutans. One day he decides he wants to understand more about where his stocks & shares ISA is invested, and...oh god - no it can’t be - he’s invested in…palm oil.
These are just a couple of examples of how your investment portfolio could be conflicting with your personal beliefs and values.
ESG is essentially a framework for analysing companies, as a way of assessing how well they compare in terms of performance against these measures. Environmental covers issues such as waste management and water usage - in short how do they manage their resources and look after the environment around them. Social relates to how well they treat their clients and employees, for example diversity and equal pay. Governance touches on the government of the company, assessing how well the company is run. This new line of thinking gives us the opportunity to compare companies, not by their revenue, but by how they impact the wider society.
Deciding to put your money where your values are can certainly be overwhelming, with so much choice how are we to ever decide? This is why it’s important to define what is important to you - for as many people as there are in a room, there will be different causes that mean the most to them.
But won’t the focus on sustainability be a trade-off for high returns? Surely we can’t have it both ways? Either we make a load of money on stocks or save the planet.
Well actually no, investing in responsible funds doesn’t necessarily mean that you’ll be giving up on performance. In fact studies show that companies who run on sound ethical principles are more likely to perform better financially in the long run, perhaps even with a competitive advantage. There doesn’t need to be a trade-off between planet and profit.
In fact, ESG investing is proven to help manage systemic investment risks. Take the Volkswagen (VW) emissions scandal for example, in 2015 the German car manufacturer was caught fitting devices on vehicles to cheat emissions tests. Before the scandal broke, VW was removed from MSCI’s ESG Index on grounds of its poor corporate governance. This allowed ESG Funds to act early and remove VW from their portfolios – when the scandal broke the companies share price plummeted over 40% “arguably” as James McManus, CIO at Nutmeg describes “due to the failings of corporate governance throughout the organisation”.
This is where consumer opinion and habits play a huge part. We’re more likely to gravitate towards companies that resonate with us, and our values, and are happy to give them our custom. This in turn means higher business longevity, higher profits, and higher returns.
The combining of strong business performance and sustainability is where we find some of the most compelling long-term solutions and investment opportunities.
And yes, individual actions are essential - we at Ocean Bottle know that. There’s a huge amount of personal environmental impact you can make by using a reusable bottle, ditching plastic cutlery, installing solar panels to your roof or choosing to cycle to work. But there are billions upon billions of pounds available today - many of these pounds belong to you - and this vast amount of capital may be trapped within the misguided notion that sustainability is an obstacle for higher returns.
When we think about the future we want, we picture an increased standard of living for ourselves and the generations to come. There are companies today who are building this future. If you see vehicles in your future, there will be companies continuing the innovation of electric vehicles that are fast, but still less polluting, fuel efficient and affordable. If you still picture eating burgers and fast food in your future, there will be companies prepared to develop plant-based alternatives that still look and taste like delicious meat, but significantly reduce water waste and carbon emissions. If you see fashion in your future, there will be companies who adapt to implement sustainable eco material alternatives, whilst also ensuring fair working conditions for their factories.
We can hope that one day ESG will be a standard option as opposed to a specialised niche that you have to ask for, but in the meantime we can make sure that investors are armed with the tools and full transparency to help them make more informed investment decisions, and understanding who will be impacted from those decisions. It’s not about making more money, but perhaps, making money do more.
If you’d like to find out more about Ocean Bottle you can find out all about their exciting projects here.