ESG stands for Environmental, Social and Governance; these are the three most important factors used to evaluate the sustainability and societal impact of an investment.
An ESG investment is a type of investment that would be highly rated on most or all of these factors.
Like all investments, ESG investments take on a number of forms. Examples of ESG investments might be shares, bonds (loans to companies and governments), and property, for example. It’s essential to know what sort of investment you are going to make, when you are considering ESG investments. Don’t be tempted to make an investment, just because it has the right ESG credentials – it still needs to be the right investment for you.
Two companies in the headlines that are currently having a positive impact of society are AstraZeneca and Pfizer. The vaccines made by these companies will likely save thousands of lives and help to restart the world’s economies, thus saving thousands of jobs. They also have good environmental records. As a result, they should score well when assessed on ESG factors. You can invest in the shares of these companies, or in their bonds (which are loans that have been made to them and which can then be bought and sold).
A portfolio of ESG investments can be held as a fund (this fund could be part of a pension or an ISA); however, a fund which is marketed as “ESG” should only hold investments which have good ESG ratings. For example, an ESG fund may contain holdings in companies that are looking to help combat the climate crisis, companies making a positive societal impact through innovative technology and companies with independent members on their boards of directors.
In the last couple of years, there has been a huge increase in the number of funds which are advertised under the ESG banner. Of course, not all of these funds are taking care to ensure that their holdings have good ESG ratings. There are plenty of fund managers who have seen the current enthusiasm for ESG investing, and who are just looking to take advantage and attract new investors. It’s important to know whether the investment manager has a genuine commitment to ESG factors, or whether their fund is just another type of “greenwash”. In later blog articles, we’ll help you to identify how committed a fund manager is.
In my next post, I’ll look at why it’s important to include ESG factors when choosing investments.
This guide is for information purposes only 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.