Living by the sea, you can’t fail to notice the impact of lockdown on nature. The water is visibly clearer, the beach, visibly cleaner.
It’s not just at the coast that the environmental effects of lockdown have been noticeable. Air pollution has fallen by up to 40% in parts of the world normally choked with fumes as can be seen in the incredible satellite images below, taken just before (left), and during (right) the first Chinese lockdown.
Other natural changes have been observed during the pandemic, too. Birds not seen in built up areas for years have appeared in inner city gardens, and in Llandudno, there have even been sightings of goats on the High Street!
Lockdown has given us a glimpse of what the world might begin to look like again, if we could curb our use of fossil fuels and take a more sustainable approach to how we live and work.
Last month we wrote about the opportunity we currently have to ‘reset’ our lives. As you reflect on the changes you may like to make in your own life, could having a positive impact on the planet via a new investment approach be one of them? After all, our money makes the world go round.
10 things to know about sustainable investing
1. An ESG (Environmental, Social and Governance) approach to investing is a responsible strategy that seeks both strong financial returns and positive social change.
2. Companies aim to increase their share price over the long-term in order to keep their investors happy. If the company is a popular shareholding for investors, the price will be driven up by demand. This means that one way we can influence an organisation that has undesirable conduct, is by NOT buying their shares. Over time, this influences board behaviour, especially if they see their competitors with buoyant share prices because they have been in high demand as a result of their good business practices.
3. The three pillars of ESG cover a wide range of issues. The following table summarises the main areas covered by each.
- ‘Environmental’ issues relate to how companies interact with the environment
- ‘Social’ issues relate to companies’ conduct towards their internal and external communities
- ‘Governance’ issues consider the way companies behave in their business activities.
All three pillars combine to define what most people would categorise as good business practice.
4. By investing in organisations that are environmentally conscious with a lower carbon footprint, we also reduce our own carbon footprint.
5. One factor that has helped ESG investment become more mainstream is that consumers now have access to more information than ever before. This allows us to be discerning about the companies we buy our goods and services from being environmentally and socially responsible. This impacts the success of a company and in turn their share price.
6. ESG investing takes several forms and, broadly speaking, these can be categorised into how diversified the resulting portfolio is.
Impact Investing: The most concentrated approach. This style usually takes the form of being goal-driven, e.g. investments in social housing projects to alleviate homelessness.
Inclusion-based: Here the approach is to identify companies that exceed a pre-determined level in one or more of the ESG categories.
Exclusion-based: As the name implies, this approach seeks to exclude those companies that fail to reach certain minimum criteria in their ESG measurements, e.g. nuclear weapons.
ESG integration: The most diversified approach. This method seeks to integrate ESG concerns into a predefined investment strategy.
7. 10 years ago, you would have been hard pushed to find an ESG portfolio if you wanted to. As the issues of climate change, child labour and sustainability have risen up the agenda, so too has the availability of ESG funds. Rather than being at the fringes of financial planning, ESG solutions are now at the heart of many investment propositions.
8. A survey conducted by the Investment Association, published in September 2019, found that just over a quarter (26 per cent) of the UK’s assets under management were invested using a socially responsible strategy.
9. It’s a common misconception that for a portfolio to be ESG, you must sacrifice return. However, over 2,000 studies have shown that a portfolio that has screened out controversial holdings and implemented ESG policies doesn’t equate to reduced performance. In fact, in 2015, it was shown that there is a positive relationship between ESG and investment returns1. It’s no longer a case of ‘principles over performance’ where sustainable investment is concerned.
Companies with improving ESG credentials have on average outperformed by 14.4% in emerging markets and 5.2% in developed markets over five years against those with low ESG credentials (MSCI, 2018)2,3.
*Returns cover a minimum of three years to 31/10/2019.
You can see that the ESG based investments have outperformed in each asset class.
Research also shows that ESG investors experienced lower volatility than standard investments during the coronavirus market slump. Fidelity International says the S&P 500 fell 26.9% on average between 19 February and 26 March. By comparison, companies it rated ‘A’ for ESG issues fell 23.1% during the same period.
10. With 7.8 billion people on the planet, can I make a difference? With ESG integration applied, more than 81 metric tonnes of CO2 per $1,000,000 of sales could be saved – a reduction of 31%! That’s equivalent to 73 acres of forest and 144 barrels of oil. That’s a very real impact individuals can have on the world simply by changing the way they invest their wealth
Life Matters offer clients investment options that incorporate ESG integration, allowing us to provide a well-diversified, low cost range of portfolios whilst having a positive social and environmental impact.
If you have further questions about sustainable investing, then we’d be very happy to talk to you about your options. You can contact us on email@example.com or 01202 025481.
Please note, the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
1 Findings by Bassen, Busch and Friede, 2015