Sustainable Investing, Environmental, Social, and Governance (ESG) and Sustainable Development Goals (SDGs) have become buzzwords in the investment industry. But what do they mean and how do they impact investing?

Sustainable Investing: A Guide to ESG

• ESG criteria aim to achieve financial returns while promoting long-term environmental and social benefits, providing a balanced approach to investing.
• These criteria align investment objectives with specific ESG standards, ensuring that financial goals are met through sustainable strategies.
• ESG criteria are a set of standards used to evaluate a company’s environmental, social, and governance performance.
• Sustainable investing encourages companies to adopt ethical practices that generate a positive impact for both society and the environment.
• Environmental factors include a company’s carbon emissions, water usage, and waste management practices.
• Social factors include a company’s labor practices, human rights record, and diversity and inclusion policies.
• Governance factors include a company’s board structure, executive compensation, and anti-corruption policies.

Introduction to ESG

ESG (Environmental, Social, and Governance) refers to the three key factors considered in sustainable investing, which aims to generate long-term financial returns while promoting sustainable outcomes. These factors are essential in assessing potential investment risks and opportunities, enabling fund managers to make informed investment decisions that align with both financial and ethical goals.

The Sustainable Finance Disclosure Regulation (SFDR) requires financial institutions to disclose ESG information, providing transparency and allowing investors to make well-informed decisions about their investments. This regulation is a significant step towards standardising ESG reporting and ensuring that sustainable finance practices are upheld across the industry.

ESG integration is a crucial component of the investment process, where ESG factors are considered alongside traditional financial considerations. This approach helps to achieve sustainable outcomes by mitigating risks and capitalising on opportunities. Investors seeking sustainable investments can benefit from ESG integration, as it not only supports environmental and social goals but also enhances financial returns by identifying resilient and forward-thinking companies.

Corporate Governance

Corporate governance is a critical aspect of ESG, referring to the system of rules, practices, and processes by which a company is directed and controlled. Good corporate governance is essential for ensuring that companies are managed in a responsible and sustainable manner, with a focus on long-term value creation.

Governance issues can significantly impact a company’s financial performance and reputation, making it an important consideration for investors. Companies with strong corporate governance practices are often better positioned to navigate challenges and capitalise on opportunities, leading to more stable and sustainable financial returns.

Active ownership and engagement with companies on governance issues can help to promote positive change. By exercising shareholder rights and engaging in dialogue with company management, investors can influence corporate behavior and ensure that companies are managed in a way that aligns with sustainable and ethical principles.

Investors can benefit from investing in companies with robust corporate governance practices, as these companies are more likely to generate positive long-term financial returns. Strong governance structures contribute to better decision-making, risk management, and accountability, ultimately enhancing the overall value of the investment.

ESG Integration

ESG integration refers to the process of incorporating ESG factors into the investment decision-making process, alongside traditional financial considerations. This approach helps investors to identify potential risks and opportunities, leading to more informed and holistic investment decisions.

There are many different approaches to ESG integration, including negative screening, positive screening, and active engagement. Negative screening involves excluding companies that do not meet certain ESG criteria, while positive screening focuses on selecting companies that excel in ESG performance. Active engagement involves ongoing dialogue with companies to encourage improvements in their ESG practices.

ESG integration can be applied to a range of asset classes, including equities, bonds, and real estate. By considering ESG factors across various investments, investors can build diversified portfolios that align with their sustainability goals.

Investors can benefit from ESG integration, as it helps to generate long-term financial returns while promoting sustainable outcomes. By incorporating ESG factors into the decision-making process, investors can better manage risks, identify growth opportunities, and contribute to positive environmental and social change.

SDG

• SDGs are a set of 17 goals adopted by the United Nations in 2015.
• The goals cover a broad range of issues, including poverty, hunger, health, education, gender equality, and climate change.
• Investors can use SDGs to identify companies that are aligned with their values and to track progress on sustainable development.

The Reality of Sustainable Investing Strategies

While ESG and SDG investing are gaining popularity, there is still a gap between expectations and reality. Many companies are still in the early stages of ESG reporting and there is a lack of standardisation. Companies support their employees, clients, and communities, which is crucial for sustainable investing. This can make it difficult for investors to compare companies and to assess their ESG performance.

Additionally, there is concern that some companies are greenwashing their practices to attract investors. Companies with strong ESG performance tend to be more resilient and sustainable in the long term, which can enhance investment returns. By considering ESG factors, we can align your investments with your values and contribute to a more sustainable future, thereby contributing to impactful solutions to significant global challenges.

Climate Change

Climate change is a critical environmental issue that requires immediate attention and action, and is a key consideration for investors seeking to invest sustainably. The impact of climate change on the planet and the economy is profound, making it essential for investors to consider environmental sustainability in their investment decisions.

Investors can play a crucial role in promoting environmental sustainability and reducing carbon footprint by investing in companies and projects that are committed to reducing their environmental impact. This includes supporting renewable energy initiatives, energy-efficient technologies, and companies with strong environmental policies.

Climate change can have a significant impact on investment portfolios, and investors should consider the potential risks and opportunities associated with climate change when making investment decisions. By investing in sustainable funds and companies that prioritise environmental sustainability, investors can mitigate risks related to climate change and benefit from the growth of the green economy.

Governments and regulatory bodies, such as the European Commission, are increasingly recognising the importance of sustainable investing and are implementing policies and regulations to promote sustainable finance and reduce carbon footprint. These initiatives support the transition to a low-carbon economy and create opportunities for investors to contribute to positive environmental change while achieving their financial goals.

Conclusion on Sustainable Outcomes

ESG and SDG investing offer the potential to create a more sustainable future. However, investors need to be aware of the challenges and limitations of sustainable investing. By doing their research and working with reputable investment advisers, investors can make informed decisions about ESG and SDG investments.

The ideal scenario would be of course that top performing investments would meet all ESG and SDG requirements, the reality is however that while standards are improving, it is still virtually impossible to attain 100% across any investment portfolio.

As part of our advice process here at Harrison Brook, we will assess your unique situation and requirements to find a bespoke solution, finding the right balance between your investment and conscience goals.