Environmental issues in the 1980s resembled a pot on a kitchen stove coming to boil. We knew the pot was there, we were aware it was boiling, and we understood we’d eventually need to deal with it or risk the whole thing bubbling over.
In the early 2000s, a former vice president was advising us how the stove had caught fire and we should probably turn the gas off and grab an extinguisher before it spread any further.
As the decades passed and we entered the 2020s, it became apparent to everyone involved that the kitchen was definitely now on fire and, if something wasn’t done soon, the whole house would burn too.
Climate change metaphors aside, as generations become more acutely aware of the Armageddon-like future that is a looming worst-case scenario, a greater focus on environmental, social, and ethical issues has increasingly become part of the mainstream conversation. Values are swaying our day-to-day decision-making process more than ever before.
CNBC reports that millennials have been driving the growth of sustainable investing throughout the last decade. They also discovered that approximately 33% of millennials are opting to only invest in environmental, social, and governance (ESG) funds or ESG compliant businesses.
But what are ESG funds exactly?
Read on to learn about the key ESG criteria and how your clients can benefit from investing in them.
ESG funds help investors make positive changes and potentially avert disaster
The disaster movies of the mid-90s – think Dante’s Peak — might seem like an odd analogy for ESG funds, but at their heart they follow the same ideology.
ESG investors are our cinematic heroes, our Pierce Brosnans and Linda Hamiltons, who know something’s wrong and set about trying to save the day long before everyone else recognises the looming problem they face.
ESG funds are made up of businesses that have undergone an assessment by an external agency, such as MSCI or RobeccoSAM. They must pass key checks along specific criteria focusing on ESG issues.
These non-financial factors are used to decide if an investment or company is sustainable and managed in an ethical manner. Once an ESG rating has been given, investors are able to use the score as a guide to ensure their potential investments align with their closely held values.
These businesses can be at the forefront of driving positive change in the world.
They may focus on environmental factors such as:
- Reducing their carbon footprint and helping to avert climate change
- Tackling volatile social issues such as discrimination within the workplace or helping to support greater social causes their employees and consumers may face
- Working towards rooting out mismanagement and corruption by holding their firms to ethical values.
Supporting ESG funds can help clients push their personal agendas and work towards averting potential disasters, like climate change, or for Pierce and Linda — the ticking time bomb that is Dante Peak’s volcano.
ESG criteria focuses on key areas such as:
If your client has strongly held beliefs regarding issues such as the environment, civil rights issues, or corporate accountability, ESG investing might be the right move for them.
The “green economy” is likely to grow in the coming decades. As climate change and other environmental issues force more companies to make changes and adopt ESG guidelines, ESG funds will probably become a larger part of your client’s future portfolio.
ESG investing could align your client’s portfolio with their values
The primary driver of ESG investing is that it puts your client’s beliefs, values, and goals at the forefront of any investing decisions.
It allows them to directly influence the behaviour of corporations by holding them accountable for their actions.
An ESG rating acts as a “red flag” for investors and can be a useful way for them to avoid unethical companies — whose actions may eventually lead to them facing serious financial repercussions at a future date.
In Dante’s Peak, Brosnan’s character saw worrying signs in the data and evidence he uncovered in the titular town that made him believe an eruption was due. However, his colleagues initially disagreed as their instincts said a cataclysmic eruption in this sleepy American hamlet was outlandish and dismissed his findings.
ESG funds work around criteria that acts like that vital evidence that Brosnan was pointing to and helps investors avoid potential risky investments — that could be due to blow up.
Some recent infamous examples of unethical business’s bringing about serious consequences include the Volkswagen’s emissions scandal and BP’s Deepwater Horizon oil spill— two incidents that cost both firms billions and sent their respective companies’ stock prices crashing.
ESG criteria could reduce the risk associated with your client’s investments by avoiding such scandals.
ESG investing could generate greater returns
Apart from the obvious ethical benefits, ESG investing could lead to significant returns for your clients.
A 2019 white paper by Morgan Stanley determined that the total returns of sustainable funds, studied between 2004 and 2018, were typically on par with traditional funds.
Additional studies have gone a step further and found that ESG investments can even outperform conventional ones. So, once the ethical benefits to your clients are factored in, ESG funds can seem even more valuable.
Morgan Stanley’s white paper also discovered that during unstable periods for markets such as 2008/9, 2015, and 2018 — traditional funds showed larger losses on average than sustainable funds.
The rapid growth of the ESG sector in recent years has made it increasingly difficult for external agencies to keep up with assessing the validity of firm’s claims that they’re truly ESG compliant.
So, it is vital your clients do their due diligence and make certain a business is meeting criteria before investing.
At Grey Parrot, we can guide your clients through ensuring a company is compliant, before helping them navigate some of the potential downsides to ESG investing such as:
- ESG funds can limit their portfolio’s diversity and investing options — as major industries such as oil, tobacco, and defence are unlikely to fit ESG criteria
- ESG investing comes at a premium with many funds proving to be more expensive investments on average.
However, if your client desires a financial outlook that aligns with their core values, they could see a benefit from ESG investing regardless of the investment’s performance.
Get in touch
If your client has any queries about investing in ESG funds or wants to determine the best approach for their portfolio, they should contact us by email at info@grey-parrot.co.uk or call us at 02039 871782.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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