COP27: Everything investors need to know about ESG investing

More than 100 heads of state and government attended COP27 (United Nations Climate Change Conference) this month, where ESG was brought into the spotlight.

World leaders gathered in Sharm El Sheikh, Egypt, to discuss and find solutions to climate change. While last year’s event – held in Glasgow – was all about plans that could help solve the global problem, this year the focus was on implementing them and making definitive steps towards transitioning to net zero. 

Positive change will require some sacrifice

For many, COP27 is just another news story or headline to be glanced at for the highlights. This is especially the case when the majority of people in the UK are facing challenges at home with rising food costs coupled with high energy bills.  

And yet, if we’re to achieve COP27 targets, we’ll all need to make some sacrifices.  

While governments must mobilise to regulate and organise energy in a sustainable way, we can look at how we might adapt our lives and make more considered decisions about the companies and products we choose to buy and invest in. 

Take a step in the right direction with ESG investing 

While COP27 focuses on climate change, ESG (environmental, social, governance) investing has a broader remit, covering a range of topics that affect the environment, people, and the ethics of how companies operate. 

“E” is for the environment and includes things like climate change, ocean trash, and water pollution. “S” is for social and incorporates women’s and children’s welfare, child abuse, and human rights. “G” is for governance, which considers how a company is run and includes things like slave labour and corporate crime. 

By understanding each ESG factor and taking the time to identify those issues that matter to you most, it’s possible to make considered decisions about where to invest your money. 

For example, you may believe that the future lies in renewable energy. If this is something you want to support with intentional investment, it’s necessary to identify which renewable energy company to invest in – but that’s not always straightforward.  

Ultimately, most investors want to grow their wealth or deliver a sustainable income. And while it’s good news that there is more scope to make well-intentioned decisions about where you invest, you’ll also want to make sure you pick companies who are going to succeed in both caring for the world we live in and making sound financial decisions. 

As with so much in life, achieving this will involve trade-offs. 

Following COP27, how far do you want to go in investing for good? 

Most investors are focused on owning a portfolio that grows their wealth or creates a source of income – for now, or in the future – so it is crucial that your investments create returns.  

Whatever your beliefs, and however strong your opinions and attitudes towards ESG and responsible investing, there’s an approach to suit you.  

Traditional portfolios for those who care, but don’t wear their hearts on their sleeve 

If you’re not too worried about investing to actively lessen your impact on the world, our traditionally structured portfolios are designed to achieve diversified, broad market returns over the long term. 

Impact investing to match strong values

Should you hold strong values that you wish to carry through into your portfolio, and are committed to seeing tangible and measurable change from where your money is invested, you may want to go down the “impact investing” route. The trade-off for this approach is that you may find the associated concentration risks and liquidity and exit risks unpalatable as this can create uncertainty about the financial returns you may receive.  

Thematic approach to focus in on one specific area of concern

The middle ground offers a thematic approach and involves creating portfolios that focus on a specific ESG area that you care about most, such as wind farms or renewable energy. This approach tends to take on sector-specific risks, often through investment in smaller companies that lack broad diversification, which can introduce an element of risk to your portfolio. 

Systematic ESG for those who recognise the value of compromise

Our preference is to lean towards a “systematic ESG” approach, which requires more pragmatic trade-offs. For example, maintaining ESG weightings in the portfolio in line with the market – this might mean owning energy and airline stocks. Because the reality is, however much we want things to change, we still need fuel for our cars and gas to heat our homes, and want to take flights abroad for a holiday or to conduct business.

While ESG gains momentum, how can you improve the sustainability of your portfolio in small, careful steps?

As climate change and other global issues force more companies to make changes and adopt ESG guidelines, ESG funds are likely to have some presence in every portfolio. 

Over time, corporate ESG data should improve, becoming deeper and wider in scope. And, with improved insight, we should also see a positive change in the ability to measure the true impact. 

New product development in the systematic ESG space is growing exponentially and the quality and availability of these products will also continue to grow. For investors committed to making a difference, this is undoubtedly an exciting time. However, the degree to which you commit funds to ESG is perhaps, at this stage, better done incrementally. 

Make a difference with small changes to your everyday choices, not just ESG

If you want to do good, without altering your current investment strategy, there are alternative ways to make a difference.  

From buying locally sourced food to recycling, and reducing the use of single-use plastic there are multiple small decisions we all make every day that can help to reduce the negative effects on the environment.  

These days it’s also a lot easier to take your business to companies who are doing their bit to help too.  

At First Wealth, we are incredibly proud to be a Certified B Corp and we run the business with the active intention of making the world a better place. 

To do our bit in creating a better world we are: 

• Committed to being a Carbon Net Zero business by 2030 
• Building a diverse and inclusive team that reflects the society that we live in 
• Continuing to evolve our investment solutions so our clients have a choice between evidence-based investing, ESG investing, and impact investing.  

To learn more about what we can do to help you make informed decisions about how to invest your money for good, please get in touch. 

Email hello@firstwealth.co.uk, book a video call, or phone us on 0207 467 2700. 

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.