ESG Investing — what is it, and how does it impact your portfolio?

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There used to be a time when investing for values and investing for profit were considered diametrically opposed.

Nowadays, there’s a lot more crossover.

In this article:

  • What is ESG investing?
  • What’s behind its meteoric rise?
  • How have companies approached it?
  • Where do the UN’s Sustainable Development Goals fit in?

ESG investing has become somewhat of a buzzword in recent years. It stands for environmental, social and governance — a way to weigh up how companies are performing in line with their ethical imperatives.

That covers everything from reducing carbon footprints, implementing equal employment strategies and managing waste effectively.

As the world races to curb emissions ahead of 2030, ESG investing is becoming an increasingly important part of an investor’s portfolio.

But how do you find an ethical investment that’s right for you?

What’s involved with ESG investing?

ESG investing covers a broad spectrum of considerations.

Essentially, it’s a way to put your money behind companies that could potentially make a return on your investment and make the world a better place. That could involve environmental, social or governance-related targets.

The CFA Institute, a global non-profit that aims to provide investment professionals with a finance education, is on a mission to promote ethical trading across the industry.

It’s outlined some of the considerations in ESG investing below:

In a September webinar on the trends, challenges and opportunities linked to ESG investing, RBC Global Asset Management’s director of corporate governance and responsible investment, Maia Becker, said this kind of investment strategy wasn’t breaking news.

“ESG investing and integration has been around for quite some time now — it’s not a new concept.

“But what has probably changed is the attention and the role that ESG integration has.

“… There’s no one event or reason for that. We do know that younger generations are more interested in ESG factors — whether they’re prepared to invest in line with that is still perhaps a bit of an open question.”

It’s gaining ground

You’re starting to hear more about the ESG investment universe because it’s gained traction in recent years.

A Morningstar report, released in February 2021, indicated that ESG-centric investments in the US more than doubled in 2020.

Specifically, ESG funds brought in US$51.1 billion in investments over last year, a sharp increase on the $21.4 billion captured in 2019.

Speaking to the jump, Morningstar stated: “The turbulent events of 2020 — the global coronavirus pandemic, continued weather extremes, the movement for racial justice in the United States and the US presidential election — underscored the salience of sustainability concerns to investment managers and strengthened the rationale for end investors to invest in a sustainable way.”

It seems investors are embracing sustainable investments now more than ever: a study from November 2020 estimated that one in three dollars of overall US assets under management is now subject to some type of sustainable investment strategy.

In much broader terms, the Global Sustainable Investment Alliance reported in 2018 that global sustainable investment has surpassed $30 trillion.

That’s 68% higher than the 2014 metrics, and 10 times greater than investment in 2004.

What’s behind the surge?

This trend towards ESG investing comes as the world works to pump the breaks on carbon emissions and better the planet as part of the 2030 Agenda.

Management consulting company McKinsey believes the zeitgeist is here to stay.

“The acceleration has been driven by heightened social, governmental and consumer attention on the broader impact of corporations, as well as by the investors and executives who realise that a strong ESG proposition can safeguard a company’s long-term success.

“The magnitude of investment flow suggests that ESG is much more than a fad or a feel-good exercise.”

Director at financial services firm Crystal Wealth Partners, Lousie Lakomy, told Proactive she’d seen a sharp uptake in ESG investing interest over recent years.

“Initially it started with excluding tobacco, alcohol and gaming. But then over time, we’ve been able to develop something better than just screening out those [investments].

“… For me it’s been quite a large shift over the last five years in clients wanting to have the conversation about investing in something that’s going to make a difference.”

For Sarah Bratton Hughes, head of sustainability in North America at asset management firm Schroders (LSE:SDR), policy is key to the uptake in ESG investing.

“You’re seeing an explosion in sustainable investing policy. The flag is in the ground in Europe, but you’re seeing pockets of it happen globally,” she stated during an ESG webinar in September.

“You also have major countries like the US, Japan, China and South Korea all making net-zero commitments.

“You’re seeing this policy backdrop that is really favourable for ESG investing and actively starting to move capital.”

A new focus for companies

As investors start to look for ventures that bank more than a return, companies are tuning in.

Lakomy told Proactive: “If it’s going to hurt their bottom dollar then they’re going to make changes.

“They don’t want to be the one that’s left on the bench.”

As part of a report on ESG considerations, McKinsey has tracked five ways a company’s focus on a strong ESG proposition can create value:

This kind of thought leadership indicates more companies are thinking of the ESG considerations they need to evolve within their business.

At the ESG webinar, Becker continued: “We’re starting to see that shift happen very rapidly in relation to the data we have relating to how a company is identifying, managing, assessing and disclosing material ESG issues.”

UN’s SDGs: responsible investing cornerstone

Something that’s really starting to shape the ESG measures companies undertake is a global framework developed by the United Nations, known as the Sustainable Development Goals (SDGs).

The 17 goals, devised in 2015, make up a to-do list for people and planet, paving the roadmap to 2030.

Among the broader goals, 169 targets aim to end extreme poverty, reduce inequality and protect the planet — an ambition that spans sectors, geographies and cultures.

Kylie Porter, executive director of the UN’s Global Compact Network in Australia, said of the SDGs: “These goals are a call to action, to develop innovative solutions to some of the world’s most complex societal and environmental challenges: fight inequality, tackle climate change, support responsible production and consumption practices and drive more innovative partnership models that aim to achieve these global goals.

“At the heart of Australia’s values is this notion of a ‘fair go’ for all.

“The SDGs provide this – they allow for business to actively participate in the creation of a better, more just and sustainable world that provides the opportunity to unlock opportunities, create new markets, drive innovation and create long-term, transformational change that delivers longer-term benefits for people and planet.”

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Which ASX-listers are involved?

Since their announcement six years ago, a suite of ASX-listed small caps have considered which SDGs align with their operations and incorporated these to guide their practices.

Bardoc Gold Ltd (ASX:BDC) is one such example, releasing its inaugural sustainability report this year.

The paper was founded on 10 of the SDGs, bringing its operations in line with the framework well ahead of its first gold pour.

Other companies have gone down a similar route — energy stock Tamboran Resources Ltd (ASX:TBN) has also aligned its business with some of the goals, as has Evolution Mining Ltd (ASX:EVN).

These are just a few of the companies that have taken up the gauntlet, and many of Australia and New Zealand’s largest companies are also using these reporting methods.

The number of public Australian and New Zealand companies who are reporting using the SDGs is growing.

With the race to 2030 on, it’s clear ESG criteria is becoming a big factor in how companies run their businesses and investors choose which horse to back.

As the world focuses on bringing leaner, greener modes of transport online and countries reach for net-zero emissions, you’ll no doubt be hearing more about this investing universe in the years to come.