Do you consider ESG factors when choosing your investments? Also known as Environmental, Social and Governance factors, these are becoming increasingly prominent on the corporate agenda as legislation evolves to make businesses more accountable for their environmental imprint.
While investing with a “green” perspective isn’t for everyone, this type of investment has evolved significantly to the point where ESG-driven assets hit a value of $45 trillion in 2020. Focused on “people, profit and planet”, ESG in practice sees companies prioritise the environmental, social and corporate aspect in all key decision-making. This means understanding how such factors determine their value as a business and actively demonstrating that their services support the values of sustainable development.
Environmental criteria look at a company’s relationship with the planet – for example, efforts made to mitigate carbon emissions and plastic pollution, as well as implement improved energy efficiency policies. Social challenges look at the impact a business has on the local and global community. This might include understanding human rights across the supply chain and supporting economic empowerment in deprived communities.
The Governance aspect looks at operating best practice regarding how your business is managed, with common considerations including data management, cyber security and gender equality in the workplace.
ESG stocks and shares
More people are choosing to invest their money with a focus on long-term sustainability and leaving a better world behind for future generations. One way to do so is invest in ESG stocks and shares in company that meets set ESG criteria. This can also be done via an ESG fund or exchange-traded fund (ETF) which invests in many such stocks collectively. Sustainable stocks come with huge upside potential as the need for a greener future shows no sign of abating.
Another of the most popular and fast emerging forms of responsible investment is green savings bonds. In a significant example of how government measures are shifting to support the fight against climate change, the UK is the first country to issue green savings products from a sovereign issuer. Announced earlier this year in the Spring Budget and launched on the 22October, the bonds are part of the Government’s efforts to hit net-zero carbon emissions by 2050.
Green savings bonds are now on sale for at least the next three months with an investment range of £100 to £100,000 per person. This means savers can use their money to back the government’s green projects and do their bit in the fight against climate change. Among a diverse range of projects eligible be funded include zero-emissions buses, innovative low-carbon technologies, accelerating the transition to electric vehicles, flood defences, protecting biodiversity and environmentally sustainable agriculture.
Proving that choosing eco-aware investments does not mean compromising on your financial goals, the bonds are offered at a 0.65% fixed annual rate over a three-year term. While interest rates on the green savings bonds may not be as high as other more traditional savings accounts, there are a huge number of benefits to choosing this route.
With the Treasury guaranteeing 100% of the investment means guaranteed financial security in comparison to the majority of savings accounts that will only protect up to £85,000. The increasingly high demand for renewable energy initiatives also means that such an investment has huge potential.
Benefits of responsible investment
The evergreen benefits of green bonds are similar to the overall benefits of responsible investing. First, you will be investing in line with your personal values and principles which is invaluable and sets a standard for future generations. But it’s not “only” the ethical and moral plus points that work in your favour.
Considering where your pensions and savings are invested could make more of an impact than you think. Research from Nordea (the Sustainable finance at Nordea report) shows that investing your pension responsibly can have 27 times more impact on your personal carbon footprint than reducing your meat intake, shortening your showers, reducing your personal air travel and taking the train instead of the car combined.
With the growing relevance of ESG to the investment management industry, investing responsibly also makes good financial sense. It means maintaining a strategic focus on the long-term value of your investments as ESG ratings become more important, and companies face being taxed heavily unless they fulfil their responsibilities.
Those companies with a good ESG rating will also often make for good investments as their efforts allow them to minimise financial risk and optimise profitability with the ability to attract increased funding, high quality employees and stakeholders, and improved sales figures in line with the global shift towards sustainable investments.
How to choose your investments
The key concern of many investors when taking the green route is how to optimise returns potential whilst maintaining a commitment to sustainability. With 100 or so companies in the world responsible for nearly three-quarters (71%) of global emissions, there are some big strikers that are instantly best avoided.
But we also need to take a realistic approach in a modern-day investing world to recognise that finding companies that tick every single sustainable box is near-impossible. Instead, we should look to those at the top of their industry game and those making tangible efforts to improve their ESG rating.
This is becoming more and more straightforward as concerns about greenwashing have been met with measures taken towards more stringent global environmental reporting standards. For example, investors into the green savings bonds will receive regular government reports and metrics trackers to help them understand the tangible positive impact that their investment is making (such as the number of households who have benefited).
As environmental projects and the concept of responsible investment are still fairly new in the grand scheme, there are some lucrative opportunities available for those seeking to align their investment interests with a personal responsibility to align with companies focused on the greater good.