Environmental elements focus on the impact a company has on the environment. This might include a company’s carbon footprint, any toxic chemicals involved in its manufacturing processes, and sustainability efforts that make up its supply chain.
Social
Social aspects consider how a company improves its social impact, both within the business itself and in the broader community. Social factors cover everything from LGBTQ+ equality, racial diversity at an executive level and staffing overall, inclusion programs and hiring practices. It also considers the ways a company advocates for social good in the wider world, beyond its scope of business.
Governance
Governance is all about how the company’s board and management drive positive change. This can include issues surrounding executive pay to diversity in leadership. It may also consider how well a company’s leadership responds to and interacts with shareholders.
Positive changes in these areas will help address the world’s sustainability and social challenges. You can start to make a difference with your investment choices.
ESG is a useful way to measure the strength and sustainability of a business
For many people, ESG investing is far more than a three-letter acronym to address how a company serves all its stakeholders, including workers, communities, customers, shareholders and the environment.
In fact, some argue that assessing a company for ESG compatibility can also be a useful way to measure the strength and sustainability of a business.
The thinking is that if a company has put in the work to balance and improve the impact they are having on the world, they become well-run companies, which then makes them more attractive to investors.
Do ESG-focused companies perform better than the others?
Sustainable funds are increasing in popularity. According to research, ESG funds accounted for 90% of equity fund inflows in July.
While ESG investing can undoubtedly have a positive impact on the world, some investors worry that focusing on an ESG portfolio may not deliver the same level of returns they might get from less ethically focused investments.
Such concerns may be unfounded. Research published in the Financial Times revealed that, over the past decade, “close to 6 out of 10 sustainable funds delivered higher returns than equivalent conventional funds”.
Because ESG investing is still relatively new, until recently, there has been limited data on the long-term performance of ESG funds. One early survey was carried out by Morningstar in summer 2020.
Morningstar looked at 745 Europe-based sustainable funds, and most strategies have done better than non-ESG funds over one, three, five and 10 years.
The study also found that sustainable funds outpaced traditional funds during the market sell-off sparked by coronavirus in March 2020, with average excess returns of up to 1.83%.
As mentioned above, companies that score high on ESG also tend to be well-run businesses. Because they treat their stakeholders well, address their environmental challenges, enjoy more conservative balance sheets, and have lower levels of controversies, these high-scoring ESG firms are often more resilient during market downturns.
Considering ESG factors is no guarantee of investment performance. As with any stock market investment, you will still experience short-term volatility and there is always some risk involved.
ESG investing is still relatively new and comes with some challenges
Investing can be challenging, and ESG adds another layer of complexity.
ESG considerations will vary according to investment style, sector and industry of a business, market trends and, of course, your objectives as an investor.
While the specific factors assessed vary, ESG rating firms commonly review things like annual reports, corporate sustainability measures, resource/employee/financial management, board structure and compensation, and even controversial weapons screenings.
Integrating ESG investments into your portfolio requires insight, research, and data to ensure investment decisions are judged correctly.
For fund managers creating and managing ESG portfolios, it is key for them to understand all the above and more.
We offer a full range of risk-graded ESG portfolios. Bowmore ESG portfolios strike a balance that provides a rigorous ESG screening process without compromising investment performance.
Get in touch
To find out more about ESG investing and how you can profit while protecting the planet, email enquiries@bowmoream.com or call us on 0203 617 9206.
The value of your investments can go down as well as up, so you could get back less than you invested.
Past performance is not a guide to future performance.
Bowmore Asset Management Ltd is authorised and regulated by the FCA.
