Environment, social, and governance (ESG) investing is on the rise. Here’s what you need to know about this approach to investing your money sustainably.
When you think of investing, what image springs to mind? If it’s the ruthless, Gordon Gekko-esque figure of the 80s and 90s, push it aside. Over the past decade, investing has gone and got itself a conscience.
The value of an investment is no longer just about how much money it can make you – but also about the positive impact it can have on the world. And that’s where ESG investing comes in.
ESG – or environment, social, and governance investing, for those not keen on acronyms – has been gaining popularity particularly. In a 2022 survey conducted by Aviva 8 in 10 pension investors agreed that it’s important to consider ESG factors when investing in their pension1.
And it’s not just woke millennials getting involved either, 8 in 10 pension holders over the age of 55 believe this is an important1. But what does putting your money into ESG funds mean – and how can you be reassured your money is actively doing good? Here’s what you need to know about ESG investing.
ESG investing: the basics
Taking an ESG approach to investing means that an investor will take environmental, social, and governance criteria into account when they’re considering investing in an asset.
So, if an investor was looking at putting their money into a company, they’d assess:
How the planet is treated
Environmental factors look at how the natural world is being affected. Factors such as a business’s energy consumption, their policy on climate change, their waste production, deforestation, biodiversity, and waste of water all play a part.
How people are treated
Social factors focus on how people and their lives are affected by the company’s community engagement, how well they protect human rights, and address issues such as modern slavery, their employee relations, gender diversity, and their working conditions.
How a company is run
Governance factors look at the way the business is run – such as the quality of management, the diversity of the board, conflicts of interest, whether there is bribery or corruption, whistle-blower schemes, and contributions to politics.
What about return on investment?
Evaluating ESG criteria is a way of enhancing traditional financial analysis, not replacing it. The aim isn’t solely to make sure that investment is ethical; the main objective of ESG, as with any investment, is financial performance.
Of course, as with any investment, the value of ESG funds could always go down as well as up and you could get back less than you put in.