SINCE YOU ASK: We explain baffling stock market terminology and how you might stand to profit – this week it’s ESG investing
What does ESG investing involve?
The managers of an ESG fund pledge to pick firms that prioritise environmental, social and governance factors or results.
The focus of governance is corporate behaviour: companies that break the law, or treat employees and other stakeholders badly should be excluded.
ESG investing is also known as ‘ethical impact’, ‘stakeholder’, ‘socially responsible’ or ‘sustainable’ investing. ESG considerations are becoming core to how directors develop strategy.
A sign of the times: ESG considerations are becoming core to how directors develop strategy
Is it a big thing?
Absolutely. By the end of this year, savers throughout the globe will have amassed £30.2trillion in ESG funds, according to a forecast from Bloomberg intelligence.
Who is the biggest name in the sector?
Larry Fink, boss of Blackrock, is credited with the recent ESG boom, arguing in 2020 that a fundamental shift in capitalism was underway to which companies and investors must respond if they wish to prosper.
Fink argues that investing in this way is neither ideological or woke, but the best route to long-term returns. doing the right thing should mean greater profitability. Some find the pronouncements on social responsibility hypocritical coming from a Wall Street billionaire, but his is a voice that cannot be ignored.
Why has ESG investing soared?
Many younger investors do not want their money put into businesses that pollute the planet, or back ‘Big Tobacco’ or ‘Big Oil’.
Older generations are also thinking this way and fund managers are catering for them. The influence of David Attenborough and Greta Thunberg on investors’ thinking should not be downplayed.
How are ESG investments selected?
There are at least 14 different frameworks used to assess the credential of a business, leading to confusion.
The Financial Conduct authority is under pressure to introduce a consistent terminology to be adopted by all funds. In the meantime, the watchdog requires ESG assertions ‘to be reasonable and substantiated’.
Does ESG have its critics?
Yes. Companies, including many fashion retailers, are frequently accused of ‘greenwashing’, misleading consumers into believing that a product is sustainable.
Others are said to be failing to reveal the impact of climate change on their operations in their financial statements.
Tariq Fancy, who led the ESG division at Blackrock, called ESG investing ‘a dangerous placebo that harms the public interest’.
He contends that the ESG managers can be subjective in their choices, or use unreliable data.
Can I trust my fund manager to do the right thing?
A company may amply fulfil certain criteria, but fail on others – which is why there is a rumpus about the inclusion of Facebook in some US funds. In 2020 it emerged that some UK ethical funds had stakes in Boohoo, the much-criticised fast fashion retailer.
The sustainability report of a company spells out its policies on ESG. A fund’s monthly factsheet, available online, will detail the companies in which it has stakes. If you are unhappy, ask for an explanation.