Under a new directive, financial advisers will be offering clients more Environmental, Social and Governance (ESG) fund choices. ESG investing is investing in companies who score highly on their commitments towards environmental and societal responsibility. The three components used to evaluate companies for ESG investing are:
- Environmental: the impact of the business on the environment considering carbon footprint, fossil fuels, toxic chemicals and much more;
- Social: the impact the business has both internally and in the broader community from gender equality and employee treatment to racial diversity through ethical supply chain sourcing;
- Governance: how the board of directors is driving positive change on issues such as equal pay and diversity, and how its leaders interact with shareholders.
Businesses striving to make the world a better place now operate on a more level playing field meaning investors can blend profit with philanthropy in their portfolios and fund businesses whose support for initiatives are closest to their heart. It could also offer performance advantages.
ESG investing has the potential to drive significant change. Last year it became a mandatory requirement for all advice firms to present clients with a palette of ESG investment options. Being part of this collective move to become more responsible investors is more likely to help facilitate widespread change.
In November 2021, more than 25,000 delegates including world leaders and environmental campaigners gathered in Glasgow for Cop26 – the UN Climate Change Conference. The message from Cop26 is that all of us, every country, company, financial institution and individual, must change our behaviour before it’s too late.
The Cop26 Private Finance Hub, headed up by former Bank of England Governor, Mark Carney, has set out a framework to help all investors put climate at the heart of their decisions, including: improving the quality of climate-related disclosures in company reporting; ensuring the financial sector can accurately measure and manage climate-related financial risks; helping identify potential investment opportunities in the transition to net zero; and increasing flows of private finance to developing economies by encouraging new market structures and connecting available capital to investable projects.
At AAB Wealth, we believe in investing in sustainable funds that strive to make a positive difference to the world we live in while understanding that moving to a more sustainable approach is a journey to be taken in small, careful steps. Over time, corporate ESG data should improve in terms of scope and coverage, along with the ability to measure the impact more insightfully. It’s an exciting time for investors who want to make a difference. It may be a long road, but the destination should be worth it.
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