Professional Firms Insight: sustainable investment – a moral revolution?
So far in 2021, the interest around responsible investment shows no signs of slowing down. With the Coronavirus pandemic adding to concerns such as the climate crisis, interest in sustainable investing and the environmental, social and governance (ESG) factors of companies has never been greater.
Sustainable investment strategies are attracting considerable interest from investors, with total assets under management growing at an extraordinary rate. With this momentum growing in the UK many professional firms have been implementing a ESG policy of their own within their businesses, while other firms have started advising their clients on building their own ESG policies to become more sustainable and resilient. For those firms advising client estates, trusts and charities, ESG investment options will certainly be an important consideration.
What is sustainable investing?
Sustainable investing combines a traditional economic approach (aiming for the best risk-adjusted returns) with a desire to improve corporate practices and benefit society and the environment. Though this approach has been around for years, today the focus is on investment return while still striving to do good.
Sustainable investing is often referred to by its hallmark acronym “ESG”, which refers to environmental, social and governance factors that investors use to evaluate a company. Performing well in these areas can benefit society, but it can also help reduce the risks a company passes on to its equity and bond investors. Environmental factors might include how well a company reduces the pollution it creates, the water it uses or the carbon it emits. Social factors might include supply chain management, wage standards or diversity policies. And governance includes corporate board structure, executive pay, and prevention of bribery and corruption.
Risks to investors are easy to recall—think about BP’s Deepwater Horizon oil spill in the Gulf of Mexico in 2010, Nike’s sweatshop scandal in the 1990s or, more recently, Facebook’s data privacy scandal. ESG investors seek to avoid these risks by divesting from or not engaging with companies with poor practices.
What are the benefits of sustainable investing for an investor?
Many investors care about ESG issues and want to invest in a way that reflects their views. Sustainable investing seeks benefits for society, supporting things like environmental responsibility, employment equality and transparency regarding corporate affairs. However, it aims to accomplish these benefits while delivering returns similar to those of traditional strategies. Negative corporate behaviour on ESG issues can hurt shareholder value while sustainable investing seeks to reduce ESG risks and deliver strong performance.
We believe it can be a differentiator—you may reach different clients than you otherwise would have without considering sustainable portfolios. Given the huge influx of investor cash into sustainable investments, it seems like a warranted addition to an investor’s opportunity set.
Also, it may help behaviourally, incentivising an investor to remain invested through good times and bad—ultimately helping to achieve financial goals. That is, sustainable investing has a dual goal of doing good and investing well, so an investor may be more dedicated to their portfolio and stand by their investments so as to not affect funding projects or companies they believe in.
How does someone invest sustainably? What are some pitfalls?
Sustainable investing requires an additional layer of data and analysis than traditional strategies. ESG analysts evaluate a company on a range of factors, typically rolling up those scores into simple metrics that investors may use when making investment decisions. This data is available mostly for public companies, although the quality of data is better in developed markets than emerging ones. The limited availability of good ESG data has been somewhat of an obstacle for ESG investors in the past, but things have improved greatly.
Today, practically all major asset classes are available to ESG investors via mandated funds. Also, investment managers have grown significant in-house expertise, adding ESG-focused analysts and specialists to do proprietary research (in addition to ESG data from providers like MSCI or Sustainalytics) and help with board/executive engagement and proxy voting.
If you are interested in exploring ESG investment opportunities further, please contact your Moore Kingston Smith partner who will be happy to arrange an exploratory meeting at our expense with one of our advisers from Moore Kingston Smith Financial Advisers.
Moore Kingston Smith Financial Advisers Limited is an appointed representative of Best Practice IFA Group Ltd which is authorised and regulated by the Financial Conduct Authority (FCA). Our FCA register number is 558116. This is not a recommendation and does not constitute financial advice. The value of investments and any income taken from them can fall as well as rise. You may not receive back the full amount of your original investment.