From ignorance to understanding – Investors’ ESG journey begins

In historical terms, it’s not been long since investors have been able to access and play a part in investment markets. For most of that time, both retail and institutional investors have been able to be blissfully unaware of ESG (Environmental, Social and Governance factors) when constructing their portfolios. It hasn’t been easy to find out how responsible your investment portfolio is, and, until recently, the financial media has been interested in other investment stories. It’s fair to say that, until very recently, much of the financial world has been scathing of what they call the “lentils and sandals brigade”.

In the last couple of years, and, in particular, since the COVID pandemic, investors and commentators have started to pay a lot more attention to ESG factors, although the E (environmental) has had much more attention than the S (social) or the G (governance). The reason for this would appear to be that investors have begun to demand that investment firms pay attention; a lot of investors don’t want to invest in tobacco, armaments, gambling, mining and fossil fuel companies.

The financial world has begun to wake up to this opportunity. And, of course, different investment firms have responded in different ways. Some view responsible investing as the latest fad, as a way to collect up more money to manage and charge fees on, whilst others see it as the future for investments, and have changed their investment approach to embrace ESG factors across the board.

The problem is that it’s difficult to know which type of investment firm you are dealing with. The best solution at present is to employ an adviser to ensure that you are dealing with the right sort of firm, if you are keen to invest responsibly.

However, the future may be different. Investors began the push to a more responsible investment world, and now regulators are beginning to add their weight to this push. Investment funds in the EU are now required to disclose ESG risks in their literature and the FCA has opened a consultation about how to standardise the information about ESG factors for investment products here in the UK.

This should mean that all investors will be provided with information about ESG factors for their investments. Whilst it may take time for the changes to be introduced, we will reach a point where ESG information is provided for every investment. Investors will still have the choice of paying no attention to ESG factors, but it will be pretty difficult to claim ignorance about how responsible your investments are.

This will move investors along – to the next stage of the ESG journey – where it will be essential to have an opinion about ESG factors and responsible investment. If you ask an expert to assess your portfolio, they will be obliged not only to tell you about its risks, charges and tax consequences, but also about how responsibly it is invested. It will be important for regulators to get this right, so that investors can tell the difference between genuinely responsible investments and greenwashing.

These changes should make it easier, and cheaper for companies which score well on ESG factors to raise money, giving our capital markets the opportunity to demonstrate that they can be a force for good and benefit society.

Companies are designed to make a profit – they won’t be around for long if they don’t, but it’s important to get the balance right. Profits over all else will likely see your customers and investors dwindle over time, but a very ethical company that doesn’t make any money, isn’t going to be around long enough to make a difference to the world.

It’s hoped that these changes will help investors shape existing companies into the ones of the future, and support the new companies that may have never made it previously.

Who knows, the “lentils and sandals brigade” might be the ones that save us all in the end.

Oliver Wise

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest.

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