What is ESG investing?

It’s fair to say investing in ESG comes with benefits and considerations, which are important to consider before making any decisions with your money.

Benefits:

• You can also choose investments based on your personal values and preferences. The premise is that companies that take steps to preserve our environment, which treat their staff well, and have strong governance in place, will do financially better in the long-term, benefiting investors. For example, a business with strong governance on treating workers fairly will be less likely to face industrial action which halts productivity – and profits.
• You can buy shares directly in companies, or invest in a fund containing a portfolio of ESG companies. These can be used in tax-efficient Isas and pensions.
• There is now official oversight of ESG claims by the FCA, which should help reduce instances of “greenwashing” in future.

Considerations:

Many ESG funds are easy to spot because they have a clue in the fund name. They might have “ESG”, “responsible”, “sustainable” or “green” in the name.

The growth in the market led to widespread accusations of “greenwashing”, where fund groups added these buzzwords to a fund’s name to increase its marketing appeal. The clampdown by the FCA is aiming to stop this from happening, but it’s still important to look under the bonnet of a fund and understand exactly how a fund manager invests.

Here’s how you can check if an investment truly fits into its claims:

• Check the factsheet – To find out if a fund is truly responsible, have a look at the fund factsheet which holds information on some of the companies it invests in, its objectives and how the fund is run. Each fund must clearly lay out what it aims to do and what investment strategy it will use.
• Visit the website – You could dig a little deeper and visit the fund company website to see if they regularly vote on corporate issues that matter to you, and whether they challenge companies on tricky issues.
• Scan the fund lists – Some platforms have dedicated fund lists to responsible investing which can help narrow down your choice. For example, Interactive Investor, the UK’s second largest retail investment platform, has a list dedicated just to best-in-class list of funds, Exchange Traded Funds (ETF) and investment trusts – the “ACE 40”. It promises these investments are managed in a genuinely sustainable manner – and says there is no “greenwashing” of information that aims to mislead about the environmental credentials of a company.
• Consider ready-made portfolios – Some investment platforms also offer ready-made responsible portfolios. For example, at Nutmeg, each has an ESG score for each portfolio from 0-10, where a higher score signifies better adherence to responsible measures.

Rather than trying to work out which companies have the highest ESG standards, you might find it easier to let the professionals do the leg work and invest in funds. There are broad funds which find a wide range of companies that align with ESG principles.

An example is Liontrust Sustainable Future Global Growth, which invests in the shares of a broad range of companies from around the world. Its top 10 holdings include biotech firm Thermo Fisher Scientific, payments giant Visa and the London Stock Exchange Group.

You can also find more specialist funds targeting one area. An example is Ninety One Global Environment, which only invests in companies that are contributing to the decarbonisation of the world economy.

You can also use an ETF which isn’t run by a manager, but is controlled by a computer, which selects stocks according to their connection to a theme such as clean water or healthcare that helps prolong life.

Green bonds are specifically designed to fund – or refinance – green projects, which might include renewable energy, making transport cleaner or protecting natural resources. They often offer lower interest rates and less volatility than traditional fixed income funds, however.

• Is ESG a good investment?

Investing for good is a popular strategy among investors who want their savings to support important causes. Companies that take a robust approach to ESG standards arguably build better businesses. Since this makes good business sense, then it can also make good investment sense. Ask yourself: what are your personal values, which sectors and companies are you happy to invest in, and which do you want to avoid?

• Is ESG investing risky?

Like any other kind of investment theme or strategy, returns are never guaranteed and there’s always the risk that you could lose your money.

Selecting broad ESG funds rather than ones which focus on particular sectors or themes can help reduce volatility.