The fact you are looking for, or already receiving advice from us would indicate that a career in financial planning is not for you. We’ve designed our resource centre so that you can dip into subjects or linger on those that interest you most. Nothing beats personal advice in our view but we hope you find the information available here useful.
Guide to ESG Investing
ESG Investing refers to a process of research and analysis of the Environmental, Social and Governance (ESG) factors underpinning a company or fund before investing in them.
It has grown in popularity as more people want to see their money used in a way that makes a positive impact on society and the world at large while also seeing their investments grow in value.
The technique is also used to enhance traditional financial analysis by identifying potential risks and opportunities that may have a material impact on the performance of the investment
The background to ESG Investing
In the 1970s the economist Milton Friedman argued that the only social responsibility on a company or fund management team was to increase shareholder value. He popularised the view that a firm or fund should only be focused on maximising profits and that shareholders themselves can then decide which social initiatives to support using the profits that had been generated for them as a reward for the risk they took on the initial investment.
At about the same time, a niche investment strategy started to gain traction. Socially Responsible Investing (SRI) focuses on sustainable and responsible investing to bring about social and environmental improvements while also looking to make a profit. In the main, SRI strategies involved excluding sectors that did not meet the ethical criteria set by the investor – such as alcohol, tobacco, gambling, firearms and weapons or any company involved in human rights violations or causing environmental damage.
A problematic issue with seeking SRI is that it is a very blunt tool. On the whole, investors simply avoid industries and companies they loathe. The recent development of ESG strategies allows investors to take a much more detailed look at the social values that form the foundation of the companies they are thinking about investing in.
As there is no industry standard on the specific areas that need to be researched to emerge with a clear analysis of each company’s ESG credentials, we have set out below the areas that analysts tend to focus on.
The Environmental component
Research for ESG Investing examines areas that illustrate a company’s impact on the world we live in. This might include:
- Energy consumption: What is the carbon footprint of the company? What are its goals and targets for reducing them? Does it use renewable energy sources, such as wind or solar?
- Pollution: What are its greenhouse gas emissions goals and how transparent is the company about reaching them?
- Climate change: What are its policies and plans and how does it report progress?
- Waste production: What are its recycling and safe disposal practices?
- Green products: What does it produce and how do the technologies behind them work?
- Natural resource preservation: Does the company use products that deplete the Earth’s resources? Does it use sustainable sources?
Recent history: Have there been any issues with environmental regulatory bodies?
The Social component
Research in this area focuses on a company’s culture and issues that impact on employees, customers, consumers, and suppliers — both within the company and in the wider society.
- Employee relations: How are staff treated? What is their pay and benefits? What is annual staff turnover? How are staff trained and developed?
- Health and safety: What policies are in place? How does the company ensure they are followed?
- Diversity: How inclusive is the company? What opportunities does it offer for advancement? What are its policies around sexual or racial harassment?
- Human rights: What is the company’s stance on social justice issues? Does it lobby government?
- Ethical supply chain: Do any of its suppliers use child or forced labour? Does the company source foods and other commodities responsibly?
- Consumer relations: How responsive is its customer service? Have there been any legal actions against it? Are there any consumer protection issues? Have any of the company’s products been recalled?
- Company vision: Does the company have a mission statement with a higher purpose for the company than simply making profits? How does the vision translate into tangible actions?
The Governance component
Investors will look at key corporate governance issues linked to the Board and company oversight as well as looking at how the management relate to all stakeholders. This might include researching:
- Management quality: How good are the key executives? What historical evidence is available that demonstrates their ability? Are they a team or do they each run their area of responsibility as a personal fiefdom? How diverse is the team?
- Executive compensation: What salary, bonuses and perks are paid to key managers? Are bonuses driven by targets designed to create long term value for the business or short term profits? Do they own shares in the company and have a personal incentive to perform well?
- Board independence: How is the Board appointed? How diverse are the Board Directors? Who are the Non-Executive Directors on the Board? Do they provide an independent view of how the company is run? How is that demonstrated?
- Transparency: How are shareholders communicated with? Have there been any legal actions brought by shareholders or other stakeholders? Have there been any votes of no confidence in the Board at the AGM?
- Conflicts of interest: Are the chairman and CEO roles separate? Are there any interlocking responsibilities across key executives and directorates? How is any conflict of interest declared and resolved?
- Disclosure: How does the company report on its results? What public statements does it publish? Does it go beyond what is legally required? How media friendly is the company? How does the company handle bad news?
What to do next
Our independent chartered financial planners are available to discuss your requirements for investing with a focus towards ESG Investments.
It is important to appreciate that there is no single fund or company that we can recommend for all investors wishing to invest within an ESG designated investment. Each investor may have different ESG Investing priorities as well as distinct investment objectives based on their own individual needs and circumstances.
In addition, funds can regularly change the companies and vehicles that they invest in. So, an investor interested in ESG Investing needs to keep a close eye on their investments as the ESG benchmark of the companies or funds selected may change over time.
At Chadney Bulgin, we always look to recommend funds that align with our over-riding investment philosophy, which you can read more about on our website: https://www.chadneybulgin.com/our-investment-philosophy/.