Spotlight on ESG investing
 
The integration of Environmental, Social and Governance (ESG) factors is now recognised as a meaningful consideration when analysing long-term investment opportunities. Whilst the reflection on environmental and governance factors remains at the forefront of asset owners' interests, social issues such as health and safety, human rights, labour rights and equality have recently been pushed into the spotlight.
 
Environmental, Social, and Corporate Governance refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria can help to better determine the future financial performance of companies.

ESG Issues

 
The following are examples of ESG issues: 

• Environmental risks created by business activities have actual or potential negative impact on air, land, water, ecosystems and human health. Company environmental activities considered ESG factors include managing resources and preventing pollution, reducing emissions and climate impact, and executing environmental reporting or disclosure. Environmental positive outcomes include avoiding or minimizing environmental liabilities, lowering costs and increasing profitability through energy and other efficiencies, and reducing regulatory, litigation and reputational risk.

• Social risks refer to the impact that companies can have on society. They are addressed by company social activities such as promoting health and safety, encouraging labour-management relations, protecting human rights and focusing on product integrity. Social positive outcomes include increasing productivity and morale, reducing turnover and absenteeism, and improving brand loyalty.

• Governance risks concern the way companies are run. It addresses areas such as corporate brand independence and diversity, corporate risk management and excessive executive compensation, through company governance activities such as increasing diversity and accountability of the board, protecting shareholders and their rights, and reporting and disclosing information. Governance positive outcomes include aligning interests of shareowners and management and avoiding unpleasant financial surprises.

The Difference Between SRI, ESG and Impact Investing.

Socially Responsible Investing (SRI) started in the 1970s as investors mostly used negative screening methods to exclude investments in guns, tobacco, gambling, adult entertainment and other vices. Investing in these stocks was seen as supporting morally “bad” or socially irresponsible businesses.

The philosophy behind this practice was that capital should be used for morally “good” industries. This basis for perceiving companies within SRI is criticized as a narrow view of the investment universe, thus an impediment to building an optimal investment portfolio.

ESG investing, though sometimes considered synonymous with SRI, is its own class of investing. ESG investing is the integration of environmental, social and governance factors into the fundamental investment process. Using ESG factors or an ESG framework, investors can select companies in which to invest. Companies that follow high quality environmental, social and governance standards are more likely to outperform their peers in the long run.

Impact investing is considered the most advanced of the three kinds of sustainable investing. It involves generating a measurable environmental and social impact alongside financial returns. The two are not mutually exclusive. Though profit and impact may conflict and contradict, impact investing rests on finding a way of implementing both financial profitability and creating a positive environmental and social impact.

Please do not hesitate to contact us if you have any questions.

Kind regards,

The Coastline Private Wealth Team.