When advising clients on their retirement our initial focus is on building their retirement plan. Once this is agreed the conversation quickly turns to investments, and one investment theme which has garnered a significant attention over the last 12 months is ESG investing.
ESG investing is a a three-legged stool – on the on one leg, you’ve got environmental factors, which is the ‘E’, and under this heading we have issues like Climate Change, including pollution, waste control, and natural resources – it’s a very broad area.
The ‘S’ deals with social issues. Areas like ‘human capital’. How do companies treat their employees? How do they treat their suppliers? How do they treat their customers? What do companies do in terms of product liability – do they take full responsibility for any potential damage that might be done by the products, manufacturing process or marketing? Also, their approach to health and safety in relation to, not just their own employees, but also suppliers – how seriously do they take those issues? All of these factors affect the human capital equation.
The final leg of the stool is governance – the ‘G’. How well do companies run themselves on the corporate side of things – how transparent are they? Is the board aware of all aspects of what the company is doing? Does information flow freely around the company? Thinking about governance generally, how seriously do companies take these responsibilities in terms of their honesty and integrity? And finally, ethics – how ethical are the standards that the company holds itself to, and how seriously do they take ethics in relation to everyone they deal with – in all aspects of their market and the environment that they operate.
So what’s been happening with ESG in recent years?
A whole array of supply and demand factors have been driving the ESG theme over the last couple of decades. At one time ESG, green or conscientious investing – however it was referred to – was quite a peripheral theme. There weren’t many funds dedicated to ESG issues 30 years ago, but over recent years ESG investing has moved away from the periphery and into the mainstream. It’s become a serious topic and a serious issue for anybody involved in investments and the investment universe.
Companies are now expected to demonstrate their ESG credentials. They’re expected to show how they match up, how they measure up in terms of the standards they deliver, for their products, their services and their employees. And importantly these areas have become a lot more transparent than maybe it was in the past.
On the support side of things, governments and institutions like the UN & EU have weighed in and made strong statements. Crucially they are also making strong financial commitments to supporting ESG themes around the world in general. This is providing serious momentum behind a lot of ESG related projects.
ESG has also become part of the regulatory framework. A recent set of rules introduced across the EU means that funds now have to effectively declare their standing within an ESG framework and assess how they rank in relation to those standards and measurements.
In terms of investor demand, awareness has obviously grown hugely over recent decades and has become a central social theme now. Investors are following the ESG principles in terms of how they allocate their investments. There’s a growing demand for material ESG components in client portfolios these days, so it has become a major issue.
How is ESG delivering for investors?
Going back 20 or 30 years, if you invested with a conscience, you usually paid some kind of a price in terms of performance – you didn’t necessarily get the best performance, but you may have liked the market. That outcome has been turned on its head in recent times as the below chart shows.
The orange line is a basket of ESG funds, which we have selected for the Harvest ESG Strategy which we are currently offering to our clients who express an interest in ESG Investing.
The blue line is a multi-asset index, but not necessarily ESG focused. The ESG Strategy has delivered almost twice what the general multi asset index has done over the same timeframe.
So ESG Investing has been good for investors, and hopefully good for the climate and social issues around the world. We don’t see this trend changing any time soon given the converging of all the supporting factors outlined above.
This marketing information has been provided for discussion purposes only. It is not advice and does not take into account the investment needs and objectives, financial position, risk attitude, liquidity needs, capital security needs and/or capacity for loss of any particular person. It should not be relied upon to make investment decisions.
Warning: The figures refer to the past. Past performance is not a reliable indicator of future results. The return may increase or decrease as a result of currency fluctuations
Warning: If you invest in this product you may lose some or all of the money you invest. The return may increase or decrease as a result of currency fluctuations. Income may fluctuate in accordance with market conditions and taxation arrangements. Changes in exchange rates may have an adverse effect on the value price or income of the product.