ESG investing - entering the mainstream? pt.1
Our investment partners at FE, recently published a document on Environmental, Social and Governance - or more simply put - ESG investing. Theres no denying that society as a whole has placed much greater focus on positive ethical consumerism and business practice over the past few years - from the reduction in plastic use to the rise in demand for vintage and second-hand shopping. As the countdown clock was unveiled in NYC earlier this week, ticking down the years, days, hours, minutes, and seconds humanity has to take climate action, we thought now was the perfect opportunity to share FEs publication on ESG investing and explore the extent to which this is developing into a more mainstream investment strategy.
As with almost every facet of life in 2020, the investment world has suffered a difficult year. As global economies stumbled into lockdown throughout February and March, markets underwent periods of extreme volatility and whichever way you look at it – by sector, asset class, or investment strategy – almost everyone suffered sharp losses or saw shrinkages in assets under management (AUM) allocated.
Despite these difficult conditions, one area of the investment world stood out during this period and challenged this trend; not only in the growing amount of capital being directed towards it, but also in investor and asset manager consciousness. In an environment of contracting markets, ‘ESG’, or ‘environmental, social and governance’ investing continues to be an area of growth and focus for the industry at large.
The full impact of the Covid-19 crisis on the global economy has yet to be understood – indeed, it may take many years to do so – but what is clear is that the pandemic has brought social, ethical and environmental factors into sharper focus. In a reimagined post-pandemic economy, consumers and investors are asking deeper questions about the businesses they engage with and how they operate, and where their money is going. Alongside this, a growing number of voices are calling on governments to ensure that the recovery, when it does happen, is a ‘green’ one, with greater emphasis placed on sustainability and environmentally friendly directives.
The term ‘ESG’ has largely become the accepted phrase within the industry. In this context it is accepted that ‘E’ stands for ‘environmental’, ‘S’ stands for social and ‘G’ stands for ‘governance’. The ‘E’ in ESG investing covers funds or investments in this area largely focus on stocks that promote sustainability, green or renewable energy, or environmentally friendly infrastructure projects. Additionally, they will seek to actively avoid fossil fuels and industries such as mining. The social aspect could include (but are not limited to) anything from companies with a strong commitment to diversity in the workplace, to transparent working procedures, working to ensure an ethical supply chain, or investment in social enterprises, or a strong focus on corporate social responsibility (CSR) initiatives. The ‘G’ in ESG stands for ‘governance’ and largely concentrates on how an organisation is managed from the top down and the decisions it takes at a managerial level. It concerns itself with the make-up and decision-making among the board, executive team, shareholders, managers and the culture embedded within a company and includes areas such as remuneration policies and executive incentives.