ESG investing: everything you need to know

'E' stands for environmental

Companies that incorporate environmentally friendly and sustainable methods, eg energy efficiency and optimised waste management, in their way of doing business will typically have a low carbon footprint.

'S' stands for social

Social factors aim for due consideration to be given to the relevant people and relationships. Areas of reform include employee treatment, training and compensation as well as equality, diversity, human rights and customer service.

'G' stands for governance

The corporate governance aspect addresses the standards to which the company is run, and highlights concerns such as bribery and corruption, ethics in all business operations, transparency, leadership efficacy and separation of duties.

ESG investing vs sustainable, ethical and impact investing

While related by factors such as the common goal of investing while backing positive change, ESG, sustainable, ethical and impact investing, nonetheless, differ in several ways.

• ESG investing means choosing to become a shareholder based on strong performance relating to environmental, social and corporate governance issues
• Sustainable investing is the broad, overarching approach which covers elements such as ESG investing and ethical investing, but it’s also often used interchangeably with ESG investing
• Ethical investing involves negative screening to avoid supporting companies with significant adverse effects
• Impact investing focuses on benefits with a direct impact in society and measurable solutions of companies, eg amount of water saved or good recycling figures

Why is ESG investing a rising trend?

The rising popularity of ESG investing can be attributed to several factors – these include:

• Acting in good conscience: the prevalence of ‘doing the right thing’ and avoiding harm is believed to be correlated with increasing awareness in matters relating to environmental, social and corporate governance issues
• Future proofing financial returns: companies that make a difference as a result of their consciousness of sustainability challenges and the role they play typically exemplify resilience, which could enhance their ability to adapt in a changing world and maybe even outperform their competitors
• Building a better world: with so many broad and widespread societal challenges (even outside of ESG), it’s common to wish for a better world. Like many others, ESG investors take it a step further by supporting the transformation of the status quo
• Conscious capitalism: this is the belief that companies must behave with the highest ethical standards while running their operations and making profits

Why do people make ESG investments?

People invest in ESG to align their financial markets activity with their values. This means that they’re unlikely to, for instance, contribute their capital to companies with a track record of significant negative impacts on the environment.

While investors can choose whichever components of ESG (environmental, social or corporate governance) that resonates with them the most, they can also cover the bases by focusing on all of them.

The long-term outlook for companies that do well with ESG is also typically positive, making them an attractive investment choice.

ESG investing and returns

ESG investing may be a way of future-proofing financial returns as companies with good ESG ratings could be better tuned for adapting in a changing world. But how does ESG investing impact returns?

Regardless of performance expectations for the future, risks remain a constant in all investment activities. Nonetheless, attaching altruistic objectives to investing doesn’t necessarily compromise returns – in fact, many studies have found that lower ESG risks have led to higher returns.¹

For example, evidence from a study conducted in 2020 (Choi et al) suggests that investors reduce their exposure to companies with a high carbon emission output in line with rising temperatures. In turn, organisations that have a lower carbon emission intensity perform better – offering greater returns to those invested.¹

How to invest in ESG

With us, you can make an ESG investment in two main ways:

• ESG shares of individual companies such as RELX, Hasbro Inc and Ashtead Group²
• ESG exchange traded funds (ETFs) like iShares Global Clean Energy UCITS ETF, and other funds such as Jupiter Green Investment Trust

See our list of the ESG stocks and ETFs to watch.

You can start investing in ESG using a share dealing account in these steps:

1. Create an account or log in
2. Select your preferred stock or fund on our share dealing platform
3. Select ‘buy’ in the deal ticket
4. Choose the number of shares you want to buy
5. Open and monitor your investment position

How to identify ESG investments

You can easily identify ESG ETFs to invest in using our ETF screener.

With us, you can also invest in other funds, eg investment trusts, and companies with low ESG risk ratings.

ESG criteria makes identifying ESG investments accessible. Companies that provide ESG data and scores, such as Sustainalytics, Morningstar, MSCI and S&P Global ratings, employ specific criteria to determine ratings.

Risk scores are typically categorised according to risk severity, eg negligible, low, medium and high. Some firms that provide ESG scores also offer the risk rating of companies and funds against each individual ESG factor (environmental, social and corporate governance).

Risks of ESG investing

As with all forms of participation in the financial markets, ESG investing carries a variety of risks. Selling company or ETF shares at a price that is lower than the original buy price means you’d incur a loss. So, you may get back less than the amount you committed, but any losses are capped at your total initial outlay (excluding additional fees).

You’d, however, receive dividends (if offered) and make a profit if you sell your shares for more than the original buy price.

While the outlook for companies prioritising ESG is strong, it’s possible that some could struggle to maintain their low risk ratings. Their revenues are also not immune to negative performance. Therefore, expected investment returns could be less in reality.

ESG investing outlook

Significant growth in ESG investing supports positive investor sentiments regarding the outlook of ESG. The numbers seem to agree that great opportunities are ahead – ESG investment contributions are said to have grown by almost 90% in Q4 2020 compared to the previous year.³ Moreover, in early 2021, ESG assets were estimated to exceed $53 trillion by 2025.⁴

Is ESG investing right for me and should I invest?

If you want to show your support for long-term sustainability, ESG theme investing could be right for you. While it may be limiting in terms of diversification, you can focus on contributing towards a better future.

Investing is an alternative to cash savings. With traditional savings, you stand to gain through interest – and when investing, your potential for profit is based on the rising asset price. However, your capital is at risk when investing (unlike when saving) – you can lose your initial outlay if the asset price drops drastically. Remember, while potential for profit is unlimited, possible losses are capped at your full initial outlay (excluding additional fees).

If you decide to invest in ESG, you could choose the factors (environmental, social or corporate governance) that matter the most to you. The performance of companies and funds will be stronger against some aspects than others, so you can prioritise assets that align with the values that are most important to you.

Other themes that you can invest in on our platform include artificial intelligence (AI), electric vehicles, 5G, water and cannabis.

History of ESG investing

The history of ESG investing stems from the origins of ESG itself. Even though ESG might seem like a relatively new concern to many, it has a long history. It has roots in a 2005 report titled ‘Who Cares Wins’ by Ivo Knopfel, which made the case that businesses should pay more attention to ESG for both financial reasons and to support better outcomes in general.

With studies showing a correlation between corporate sustainability and financial performance released in 2013 and 2014, buy in was secured among many fund managers, insurers and more. Soon after, strategies covering how to integrate ESG thinking into a traditional investment strategy emerged.