ESG investing allows you to invest in companies that value the environment and push for progressive social reforms. Investing in an ESG fund means more of your money goes towards eco-friendly firms committing to be carbon-neutral, as opposed to oil and gas companies present in most pension providers’ investment portfolios.

Estimations from The Path (a group of advisors specialising in positive impact investing), claim that moving £100,000 of your pension pot into a typical ESG fund is the equivalent of taking 5/6 cars off the road each year.

Even better – the recent explosion in ESG popularity means you no longer have to sacrifice returns for responsible investing principles. Research by Morningstar found that the majority of European ESG funds performed better than non-ESG funds over a 3, 5 and 10 year period!

So what exactly is it?

ESG stands for Environmental, Social and Governance:

  • Environmental – What kind of impact does this firm/government have on the environment? This can include a company’s carbon footprint, the sustainability of its supply chain and the amount of pollution or waste it is responsible for.
  • Social – Does this firm operate in a socially progressive manner, promoting racial diversity and LGBTQ+ equality? Does the firm take good care of their workers, or do they exploit cheap labour in third-world countries? There are many more areas under the “social” umbrella which are assessed, ranging from charity contributions to the social impact of the product.
  • Governance – How does the company (or government) govern itself in a socially responsible manner? “Governance” examines executive pay, worker representation and any illegal or discouraging behaviour such as lobbying and bribery.

A company or government is given an overall score, or rating based on the ESG components above. The higher the score, the more “ESG-friendly” a company is.

There is no industry-wide set of common ESG ratings. Each rating is independently determined by the particular ratings agency or research company, the most popular being Bloomberg, Dow Jones and Standard & Poor’s.

ESG investing is investing in companies that score highly on these environmental and social responsibility scales.

An ESG fund is an investment fund which favours “ESG-friendly” companies, giving them a larger weight than a standard portfolio. Each fund is different, largely because it is up to the creator of the fund to determine what score constitutes as “ESG-friendly”.

On the whole, ESG investing can allow you to put your money to work with companies that strive to make the world a better place. “Voting with your money” provides a clear signal to corporations that investors care about the environment. Once firms recognise that not taking into account social and environmental factors can cost you money, many will move towards the “ESG-friendly” badge.

How do I invest?

If you wanted your pension to be invested in more eco-friendly firms, you can check with your pension provider to see if they offer ESG options. Although pension providers are largely late to sustainable investing, most workplace pensions will offer some sort of ethical or sustainable fund outside the main default fund.

You can always switch providers. Many large providers including Legal and General, Scottish Widows and Royal London offer an environmental fund.

Another option is to open a personal pension or a self-invested personal pension (SIPP). This will give you complete control over what you invest in, meaning you can create your own ethical portfolio that matches your investment objectives.

There are, however, numerous different types of ESG funds and ETF’s, all flooded in financial jargon, many with their own classifications and rating systems.

Many companies in ESG funds are guilty of greenwashing, whereby appearing ESG-friendly is for marketing purposes only. However, whatever the motives, a move towards sustainability is a step in the right direction.

Money talks, and if investors view ESG-friendly firms as more attractive, companies will follow suit.

Do not underestimate the influence your investment strategy has on climate change!

With the help of your financial advisor, you can choose investments with high ESG ratings that are aligned with your individual investment goals.

 

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