E.S.G. funds - the new normal?

If you haven’t heard of the term ESG when considering investment funds, the likelihood is that will change in the very near future. ESG investing is a process where the underlying investments within a fund or portfolio must meet criteria on Environmental, Social and Governance issues in order to qualify. You may be aware of “green” or “ethical” or even “socially responsible investments” and ESG is where we have now evolved to in the current climate.

ESG is designed to encourage companies, investors, fund managers, trustees and anyone making investment decisions to take more responsibility for where they are investing those funds. It is a fundamental change in investor behaviour rather than a process. We have started to see high-profile institutional investors beginning to remove companies from their portfolios who for example actively contribute to global warming or are not doing enough to reduce their carbon footprint. This can send an immensely powerful message to business owners, shareholders and consumers that change is needed now.

From next year there will be a requirement for financial advisers to consider suitability of ESG funds within their advice processes. At present the question posed for example may be “Would you consider investing into ethical or sustainable funds within your investment portfolio?” In future this is likely to be reversed to “Is there any reason you would not want to invest into ethical or sustainable funds or funds who are ESG compliant?”. This may seem like a small change, but it will potentially mean that most investment flows will move towards ESG arrangements where it is currently the minority. Companies who do not adapt and make the necessary changes could be left behind as investors choose more sustainable alternatives.

We must continue to look at our behaviour and the impact we are having on the planet and the legacy we are leaving for our future generations. Huge progress has been made in recent times with recycling, pollution and plastic reduction but it still is not at a pace quick enough to reduce the global damage being done. By questioning your investment behaviour and where your portfolio is being invested, you can directly and collectively contribute to making an immeasurable difference without lifting a finger.

The historical view was that if you wanted to invest in “ethical” funds, you needed to compromise on performance due to a limited range of companies being available within that sector. That landscape has now changed as we are seeing more companies behave responsibly and the positive impact that can have, therefore greater investment opportunities in more diversified sectors exist. We still have a long way to go, but as this accelerates, so will the benefits and also the potential future returns. This can already be seen through the recent returns over the last few years where ESG funds have started to outperform their non ESG equivalents. Not always though, so research and discipline are still critical when selecting funds of this type.

It is important to note that ESG investments can carry significant risks depending on the underlying holdings being purchased on your behalf. It is also imperative to clarify with your adviser what the risks, costs and objectives of the funds being recommended are and that it meets with your own risk profile, timescale and capacity for loss.

The independent advisers within this forum would be able to provide you with ESG guidance or evaluate your existing investment portfolio or pension funds to move towards ESG compliance in future. They should also be best placed to choose from the entire market of ESG funds which are available across a number of platforms and financial products.

Please note: “Investments can fall as well as rise and you may not get back the original amount you invested.”