Premier Wealth Management based in Birmingham, UK

What does ESG mean when investing?

Social and environmental change is happening faster than ever. We have all experienced significant examples of these in the past few months, between the pandemic, climate change, social demonstrations, all of which have dominated the headlines during the past months. Many of us are already making changes in our day to day lives to support a more sustainable society. Considering whether your savings aligns to your moral beliefs is a simple, but often overlooked, additional way of supporting positive change.

We previously shared an insight on our website talking about ESG investments (for a definition of what ESG means please refer to this one, ESG investing ). On this occasion, we would like to share with you some of the different approaches to ESG factors.

Choosing a fund for your savings or pension that considers ESG factors is one of the steps you could take to ensure your savings are invested responsibly. As well societal and environmental impacts, companies’ responses to issues such as climate change and the pandemic could ultimately impact investment returns. That means choosing a fund with an ESG approach could also be beneficial to the value of your savings – although there are no guarantees.

There are many different types of ESG approaches to investing. The approaches differ in terms of denomination, objective and criteria used, but broadly speaking they can be split into five categories:

ESG integration: It means ESG factors are considered in the investment decision-making process. The fund manager will use their shareholder power to engage with companies and use voting rights to influence positive changes.

Negative screening: These funds typically avoid investing in companies which don’t meet established ESG standards.

Positive screening: In opposition to the previous point, this approach favours companies that have a positive or improving ESG performance relative to their competitors.

Positive impact: Funds invested in companies that are actively engaged in activities aiming to deliver a measurable social or environmental impact alongside a financial return.

Thematic investing: These funds focus on specific themes, such as energy efficiency, sustainable agriculture, clean water, healthcare, and affordable housing.

A benefit is that these categories are mutually inclusive, meaning more than one category could apply to a fund.

Furthermore, increasing evidence has confirmed a positive connection between a company’s performance and their approach to successfully managing ESG factors1, which in turn could have a positive impact on your savings. Remember though that past performance isn’t a reliable indicator of what might happen in the future.

Finally, some important information to remember. The value of investments may go down as well as up. Investors may get back less than they invest.

This article is for information purposes only. Reliance shouldn’t be placed on this information when taking individual investment decisions. If you need any help, please speak to the Temple Row Team.

Source: 12022 The growth opportunity of the century – Are you ready for the ESG change? Data source, PWC, 2020.

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