ESG Investing

A few years ago, if you wanted to invest in an ethical fund, you had a choice of one or two funds in the whole of the Irish market. The fund didn’t invest in industries like tobacco, guns or porn and that was it. In 2018, there were 305 new ESG funds launched in Europe and about the same amount again in 2019. The old fund of not investing in immoral type companies are now labelled Socially Responsible Investments (SRI) and subset of ESG Funds

What are ESG Funds?

ESG stands for Environmental, Social and Governance

  • Environmental – Does the activities of the business have a positive or negative impact on the environment? How do they manage pollution? Do they try to minimise it and control it? Do they employ best practices in reducing the impact their business has on the environment?
  • Social – What impact does the business have on society as a whole? Do they treat their employees well and not seek to exploit them? Do they promote health and safety?
  • Governance – How is the company run? Do the have the structures and checks in place to ensure the company is run in accordance with corporate governance. Is information disclosed to the Board and its shareholders? (I think the FAI is excluded as an ESG company!).

They are not ethical funds which are their own category in this space. An ethical fund will not invest in funds that have a negative impact on society.

Will I get lower returns?

People seem to think that by investing in ESG investments they have to sacrifice returns on their investments. This is not true. Companies that fit the ESG criteria tend to be very well run companies that are forward looking, employing the latest technologies to cut down production costs and well treated productive staff.

The graph below shows the comparison between the MSCI All Country Global Index and the Baille Gifford Positive Change Fund since January 2017.

That is just comparing one fund with an index, so I looked at a number of different ESG funds. The time frame is even shorter, from October 2018, but it shows that ESG funds are just as competitive against the MSCI AC Global Index.

Are ESG Investments a fad?

What are the main drivers for people wanting to invest in ESG funds? It’s climate change and the environment. Climate change is the biggest challenge that mankind has ever faced and it is a real issue for Millennials and Generation Z as it is the planet that they will inherit. When they invest in their pension funds, they want to invest in forward looking companies that are not going to destroy the planet.

This in turn forces fund managers to act by looking at companies that do meet the ESG criteria. And pension funds and fund managers can have a big enough influence on companies to make them change. It is more likely that ESG investments will become more common or maybe even become the new normal.

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