The pandemic has rocked the foundations of economies worldwide and at the same time afforded us a moment to take stock of where we are and where we are headed.
During the pandemic we were stuck in a present, with an inability to plan when we might go back to work; go on holiday or see our families. We were having to get used to a “new normal” which included zoom meetings, working from home, home baking and home schooling.
Now that we can see our way out with the help of a vaccine, we can start to look back and assess the damage. We are being encouraged to “Build back better”, start a Green Industrial Revolution, and consider sustainable or ethical investing.
Within the Financial Sector, we can now assess investment opportunities using ESG criteria. ESG (Environmental, Social and Governance) criteria are standards that socially conscious investors use when looking at a company’s operations.
These include Environmental impact and how committed a company is to reducing its’ negative impact on the environment. Social Impact – which looks at how a company treats its’ employees, suppliers, and customers as well as the local population where it is based. Corporate Governance Impact examines the company’s leadership and key areas such as executive pay, diversity of the company’s board members, its’ tax strategy and the company’s code of conduct.
Many investors are now using these criteria to decide how they wish to invest. Popular funds have been set up to cater for this type of ethical investor. It should be noted that the same ESG strategies can directly affect financial performance. Companies who are not interested in their energy use, pollution, or waste, may not be managing risk adequately. This in turn, may directly affect their share price and could affect their long-term performance. Furthermore, there is evidence that companies that rate highest against ESG criteria financially outperform those companies who do not.
No company will meet all the ESG criteria, so investors will need to decide what their priorities are. Companies must also position themselves for long-term performance and decide what their priorities are. Analysts are now able to track and review the ESG performance of companies, and investors are more able to influence the future direction of travel.
ESG products are not without risk, and sometimes there is greater risk attached to the reduced diversification of a portfolio when comparing to a non-ESG portfolio. However, we all need to take risk to help the planet heal.
For more information on ethical/sustainable investing, please contact us on 02037 405 542.