Environmental, Social, Governance (ESG), a term coined back in 2005, has gained greater importance among investors, policymakers, and other key stakeholders.
What is ESG?
If we break it down the ‘Environmental’ criteria seeks to evaluate whether a company is helping to promote a cleaner environment or not. ‘Social’ looks at whether a company is creating a positive impact within its community through how it treats its employees and ‘Governance’ identifies the decision-making process of a company; whether it has a diverse board and provides employees with equal pay etc. Overall, ESG is a broad category and for this reason, it can mean different things to different people.
Why is ESG becoming more prominent?
ESG has been a frequent topic of political discourse over the past few years, and has filtered down to the general public. We’re now beginning to see more investors wanting to align their portfolios with their values.
ESG was already gaining steady traction amongst investors over the years, however to give you an idea of the growth; ESG assets surpassed $35 trillion in 2020 up from $22.8 trillion in 2016 reaching a third of current total global assets under management. According to Bloomberg Intelligence, ESG assets could potentially exceed $50 trillion by 2025 if it assumes just 15% growth, which is only half of the pace of which it has grown by during the past 5 years.
Recent global events have played a key part in bringing ESG to the forefront of investors’ minds.
During 2020 we saw people across the world retreat into their homes, cars came off the roads and nature was able to breathe a breath of fresh air. Investors witnessed first-hand the harmful effects fossil fuels were having on the planet and many took this as an opportunity to put their investments to positive use.
And most recently we’ve seen the Russian invasion of Ukraine – aside from this being a huge humanitarian crisis, the war has highlighted the global reliance on fossil fuels and accelerated the transition for economies to adopt more diversified measures for sourcing sustainable forms of energy.
Our portfolios and ESG
Our funds and segregated equities* are screened against the MSCI ESG rating tool. We choose to use MSCI to score our investments due to its position as a market leader in driving ESG and climate transparency amongst investors. Each of our investments are screened on a monthly basis by using rules-based methodology to identify industry leaders and laggards. The investments are scored on a scale of AAA (Leader) all the way down to CCC (Laggard) depending on their exposure to ESG risks and how well they manage these risks relevant to their peers.
We want clients to know that our standard portfolios are not mandated to screen for ‘green’ investments or to promise a particular ‘ethical’ focus, however we do use ESG alongside traditional financial analysis to help us further understand a company’s sustainability, which we believe will ultimately have an impact on its profitability over the long term.
* Segregated equities are individual assets held outside of pooled accounts (mutual funds) e.g. individual shares in BT Group Plc, Barclays Plc & Next Plc etc.
How is ESG different to SRI (Socially Responsible Investing)?
First and foremost, we mustn’t confuse ESG with being green. Our Ethical portfolios adopt a more concentrated approach to Ethical investing by following an SRI (Socially Responsible Investing) methodology where possible. SRI invests in those that promote positive change and excludes those making a negative impact. These Ethical portfolios are constructed specifically to align our clients’ views with conscious investments through making full exemptions of industries such as; fossil fuel extraction, controversial weapons and tobacco, and investing in best in-class considerations, rather than simply screening for ESG criteria.