Ethical investors follow an approach that typically advocates for, or at least considers, best practice to limit corporate impact on the environment and society. Ethical investors do not claim that ESG investing is always more profitable than traditional investing but rather that it can sometimes be more profitable however, there are risks inherent to any market investment even with consideration for ESG issues.
Environmental:
A business that abides with ethical investing would attempt to efficiently manage resources and prevent pollution resulting in a reduced emissions and climate impact as well as executing environmental reporting or disclosure. Positive outcomes derived from reducing a business’s environmental impact include avoiding or minimising environmental liabilities, lowering costs and increasing profitability through energy and other efficiencies.
Social:
The social criteria looks at a business’s internal and external relationships. These risks, which may have an adverse effect on society as well as societal values can be mitigated by how they conduct themselves such as promoting health & safety in the workplace or encouraging labour-management relations to create positive change within their communities. By creating this kind of environment for employees, t is hoped we will see increased productivity, reduced turnover rates and absenteeism.
Governance:
Governance not only helps align the interests of stakeholders and management but also provides transparency so that any potential litigation risk can be limited or eliminated altogether while protecting shareholders from financially treacherous decisions like excessive executive compensation with risky loans. Governance in an organisation has many benefits such as promoting accountability among all parties involved (company executives) and providing information for investors on what they’re investing in.
What is Traditional investing
Traditional investing, also referred to as non-ESG investing, comprises any investment in financial markets that does not have the consideration of environmental, social and governance concerns. This means there can be a variety of investments from commodity producers such as oil companies who may face potential costs arising from climate change, or firms with controversial supply chains. The practice is widely followed through investment funds, government bonds, super and pension schemes.
What are the Benefits of ESG
ESG investing can be beneficial for both parties involved in a transaction. Investors can see rises in the value of their investment through ESG companies’ political and environmental activism, which could benefit the immediate environment and society surrounding them. For example, if a company invests in clean energy sources such as solar power it has an impact on the surrounding society by reducing harmful emissions resulting from fossil fuel production. This means that ESG investing can be profitable and advantageous to the environment and society.
What is the future of ESG investing?
There are several different ideas on what will happen in the future and how it will affect markets and investors. The idea that climate change may become a more pressing issue, for example, could lead to more focus on clean energy investment and ESG stocks, while the opposite could happen if the issue becomes less prominent.
Another possible scenario is that ESG investing could continue to play a larger role in financial markets and investment portfolios, potentially leading to increased global impact such as the creation of an international set of environmental standards. There is also room for continued disagreement about how ESG factors should be weighted in investment decisions.
Where we can help
We as your trusted adviser, can review and assess your superannuation and investment portfolios to consider adding ESG financial products such as ETFs, Managed Funds and separately managed accounts to your portfolio.
We feel the advent of ethical investing is becoming the norm and no longer a question to be answered by individual investors but as a community that wants to bring a positive change.
We will look to introduce ethical/ESG investment options into our portfolio construction and management more and more while continuing to assess their viability. This is to ensure our clients hold the best investment options available to them that are aligned to their investment strategy.
If you would like to discuss how you can introduce ethical investing into your portfolio, please contact us today!
