Whether you are an adviser, an employer or an employee, the term ‘ESG’ – which stands for environmental, social, and governance – will be increasingly cropping up in the pensions and investment worlds.
But it’s also a term that is increasingly surrounded by confusion and misconceptions. So, it’s worth biting the bullet and taking a little time to get your head around it now.
A common mistake is to regard ESG investing as being synonymous with ethical investing. There are important differences.
Ethical investing is largely about avoiding companies involved in areas that run contrary to peoples’ ethical beliefs – like, for example, weapons, animal testing and oil. But ESG investing is more about seeking out investments that have a positive long-term impact on society, the environment and the performance of the business.
Environmental issues can include everything from greenhouse gas emission and climate change to deforestation, resource depletion and waste and pollution, whilst social issues focus on how companies treat people – from employee relations and diversity to health and safety, working conditions and human rights.
The term ‘governance’ meanwhile refers to the practices, rules and codes of behaviour affecting how an organisation is run. It can encompass financial, strategic and risk management issues ranging from executive pay and the diversity of board and leadership teams to data privacy, political lobbying and anti-fraud and corruption measures.
ESG scores aim to measure and compare company behaviours in a standardised way, marking up organisations that are proactive on ESG issues and marking down those that make less effort.
They can be used as a tool to sit alongside other more traditional investment metrics to help evaluate whether a company is worth investing in because there is a growing realisation that businesses that adopt ESG standards tend to be more likely to achieve long-term commercial goals as a result of being more conscientious, less risky and better positioned to react to crisis and change.
The lingering idea that ESG companies are likely to underperform the market as a whole is a misconception. If anything, the opposite is true because the ESG screening provides an additional level of due diligence, weeding out outdated practices and unsustainable organisations.
Indeed, interest in ESG investment is nowadays probably just as motivated by value as it is by values as there is a growing appreciation of the risks involved with firms that score poorly.
As an example, one need to look no further than the spectacularly unsuccessful recent floatation of Deliveroo, which was boycotted by a number of fund managers over concerns about the working conditions of its delivery riders.
Some Workplace pension schemes now offer employees the option of choosing to invest in ESG funds, and we are seeing pension providers launching ESG default fund options.
We are also seeing that providers are looking to embrace responsible investment practices across all they do and incorporate this approach into their default investment funds.
One of the challenges is how do we communicate the importance of ESG and highlight to employees that their funds are being invested responsibly? Chase de Vere can work with you and your pension provider to support you with this communication.
We are seeing more enquiries about ESG and sustainable investments and, hopefully this will grow over time as more press coverage is given to ESG investing and the impact that employees’ pension fund investments can have in making positive change in the world.
The value of investments can fall as well as rise. You may not get back what you invest.
Content correct at the time of writing and is intended for general information only and should not be construed as advice.