ESG (Environment, Social, Governance) Investing

What is ESG?

ESG is a method used to measure the impact and sustainability of the funds you invest in. It is part of a wider umbrella term called Sustainable Investing – an investment approach which aims to advance sustainable solutions while still generating long-term financial returns.

ESG investments are defined and graded through a set of criteria which measures how investments or companies perform in Environment, Social, and Governance categories.

Environmental factors look at the conservation of the natural world, Social factors examine the treatment of people both inside and outside the company, and Governance factors consider how a company is run.

There are several ways to incorporate ESG into your investment portfolio. The Morgan Stanley Capital International (MSCI) organise these into three categories which we feel are useful: screen, integrate, and target. Screening is ‘exclusions on certain business involvement issues or reduction of exposure to the highest carbon emitters’. Integrate means indexes which ‘represent diversified strategies to integrating ESG data into broad-based indexes’. And target refers to indexes designed to target a specific ESG theme in a more focused and targeted exposure.

Ultimately, ESG approaches change from person to person. Discuss the issue with a Chartered Financial Planner.

What are the potential risks?

Planning for ESG investing presents a couple of interrelated risks. For instance, the limited number of ESG funds on the market. And the fact that this lack of choice means that a portfolio fully committed to ESG investing wipes out a large majority of available investments. One of the key risks of ESG investing is the lack of historical evidence compared to other investment approaches.

Other risks include, greenwashing, changing sustainability development goals, and external factors beyond investor control (such as whether a government provides subsidies or not).

Before making an investment, it is important that you discuss the risks with a Certified Financial Planner. At First Wealth, we practice evidence based investing, so we will always follow the evidence.

How do we plan for ESG?

First Wealth have set up ESG portfolios so clients have the option to invest in a more sustainable fashion, while staying aligned with our evidence-based investment philosophy.

Our investment committee designs the ESG offering to align our investment beliefs with our sustainability goals.

Planning for ESG investing presents a couple of interrelated challenges. First, the limited number of ESG funds on the market makes it difficult to go to the lengths we’d like. And second, this fundamental limitation means that a portfolio fully committed to ESG investing wipes out a large majority of available investments.

Talk to an adviser

Questions we get asked a lot

How is our ESG offering decided?

Our investment committee designs our ESG offering to align our investment beliefs with our sustainability goals.

We have set criteria that allow us to screen out the products that we would and wouldn’t invest in. We score funds or products according to specific ESG credentials. And because we have a score for each factor, we can more effectively match your objectives to the investment opportunities.

Typically, ESG was a space dominated by active fund managers and higher costs. Now companies like Dimensional and Vanguard are doing great things. And, over time, this is going to get even better.

This is why we create our ESG offering to align with the First Wealth Evidence-Based Investment philosophy.

Does ESG have a focus on impact?

People are more aware of the impact they have on the environment. They want to lessen their carbon footprints; they want to invest in companies that do good by themselves.

Therefore, as clients increasingly become more aware of ESG investments (and because we are now a B Corp company), we believe it is in everyone’s interests to take steps to improve the sustainability of our practices.

The ESG market is still growing and as it does, we work to keep up with what is available to you and finding those funds that will put your money to work while doing good.

What are ESG criteria?

ESG is measured against three criteria.

The environmental criteria measure the direct or indirect impact of a company’s activity on the environment. This may include things like greenhouse gas emissions, waste recycling, energy consumption, risk prevention, and respect for biodiversity.

The social criteria measure the direct or indirect impact of a company’s activity on its stakeholders (for example, employees, clients, communities) in line with universal values. These may include human rights or international labour standards. In practice, this criterion considers things like the ratio of male/female representation within the company, access to training, employee rights, and the employment of those from minority backgrounds and those with disabilities. You can consider this when making ESG investments.

Finally, the governance criteria consider the way in which a company is managed and controlled. This covers the role of shareholders, transparency of executive pay, management structure, audit committees, and more.

How do I know which investments are ESG?

First Wealth have set up ESG portfolios so clients can choose to invest in a more sustainable fashion, while staying aligned with the First Wealth evidence-based investment philosophy. Our investment committee designs our ESG offering to align our investment beliefs with our sustainability goals.

Should you wish to invest in ESG offerings, the options are clearly labelled as such and will be identified to you by your adviser.

What does ESG mean for businesses?

It is becoming increasingly important for successful businesses to take on more active roles in their community and the wider environment. They need to have purpose beyond profit.

Though improving your score against ESG criteria may be a lengthy process to begin with, the implementation of improved ESG approaches within businesses is a strategy which can contribute to company expansion, and more durable success.

How do I find out more?

If you’d like to learn more about ESG investing and how you can invest your money and do good for the world, please get in touch. Email hello@firstwealth.co.uk or call 020 7467 2700.

What is the difference between ESG and CSR (Corporate Social Responsibility)?

CSR is a strategy for management in which companies integrate social and environmental concerns to positively impact society whilst also increasing brand reputation.

ESG is an assessment of environmental, social, and governance factors in businesses and investments.

How do you measure ESG performance?

ESG performance is often measured using quantitative and qualitative indicators, including metrics like carbon emissions, water usage, employee engagement rates, employee turnover rate, and more.