ESG investing - Can responsible investments lead to better long-term returns?

ESG looks at how a business manages its impact on people and the planet, considering areas such as pay equality and employee benefits, as well as energy efficiency and waste management, and regulatory issues.

ESG looks at how a business manages its impact on people and the planet, considering areas such as pay equality and employee benefits, as well as energy efficiency and waste management, and regulatory issues.

In the past, ESG has often been considered to be a niche strategy – one that can lead to surrendering returns – but it is now an area that investors and fund managers are increasingly considering as part of their analysis and risk management processes when it comes to acquisition and investment decisions.

As environmental and social concerns continue to grow, becoming more important than ever before, investing in businesses that are environmentally and socially conscious can provide higher financial performance and lower risk – helping to ensure long-term, sustainable returns.

How is ESG measured?

Broadly, ESG analysis considers how businesses create value for their consumers, employees, and wider society, and how this impacts both their current and future performance in terms of the following areas:-

Environmental risk

This measures the extent to which business’s operations have an environmental focus, and considers various areas such:

  • Commitment to environmental initiatives
  • Energy Efficiency
  • Waste Management
  • Water Efficiency
  • Social risk

Social risk considers a business’s policies and practices regarding labour and supply chains, including:

  • Working conditions
  • Health and safety
  • Leave Benefits
  • Pay Equality
  • Diversity and equal opportunities
  • Governance risk

Governance analysis looks at how a business’s objectives are set and achieved, how risk is monitored and addressed, and how performance is optimised with regard to:

  • Anti-corruption
  • Lobbying presence
  • Regulatory issues
  • Tax corruption

Why is there now more of a focus on ESG factors?

A greater consideration of ESG factors in recent years is due to a variety of factors.

There is an increasing environmental awareness amongst governments, businesses, and consumers, which is something that has been further accelerated by the COVID-19 pandemic.

The UK government, for example, has signalled its intention for a green recovery from the COVID-19 pandemic, which comes alongside the goal to reach net-zero greenhouse emissions by 2050. There are also plans in place to introduce mandatory reporting of climate-related financial information across the economy by 2025.

Alongside changes in legislation, consumers are increasingly considering environmental and wider social factors in their decision-making processes, making more informed decisions about the businesses they choose to support. Reputation and brand value are important factors in relation to ESG analysis, and businesses perceived to be ‘giving something back’ to their customers, employees, and wider society are likely to improve their bottom line.

Whilst often overlooked when it comes to ESG analysis, governance is an equally important factor for investors. In recent years, a number of businesses have been forced to enter administration or liquidation as a result of poor governance. A sustainable business model that focuses on long-term thinking – as opposed to short-term growth – alongside strong leadership is a key consideration for investors.

As ESG concerns continue to become centre stage, a more investor-friendly landscape for socially and environmentally conscious businesses is becoming apparent, where investing in line with ESG principles is likely to lead to better returns.

Incorporating ESG into your investment strategy

According to research by Redington, 73% of managers believe ESG integration is a positive addition to the assessment of financial performance.

It is important to note, though, that enhanced financial performance as a result of improved ESG practices is not a quick process, but one that focuses on the quality of returns in the long run.

Considering ESG factors in investment decisions can play a crucial role in identifying new opportunities and mitigating risk, ultimately leading to stronger investments that provide better long-term returns.

However, Individual investors should be aware of the potential challenges that may arise when looking to incorporate ESG into their own investment strategy, which include:

Greenwashing – Some businesses exaggerate their ESG performance to present an environmentally and socially responsible public image that is not accurate, in order to appeal to investors.

Disparity in reporting standards – ESG factors are not currently subject to the same reporting standards as financial accounts, meaning the intangible assets considered in ESG – such as supply chain, conduct, reputation, and brand value – can be hard to measure.

The subjective nature of ESG – As ESG does not focus solely on financial performance, analysing a business’s performance in relation to ESG factors will be subjective and may vary between investors.

How we can help

When it comes to investing your money, it is important to look further than a business’s financial performance.

If you need advice understanding how responsible investing can help achieve long-term returns and guidance on the best choices for you, we are here to help.

When it comes to investments, our aim is to meet your long-term goals, controlling risk through personal profiling and maximising return through the careful implementation of the best investment products that are tailored to meet your individual objectives.

We also conduct regular reviews of your investment strategy enable us to take into consideration changes in legislation, governments and even personal or family circumstances and adopt the investment strategy to suit.

If you would like to arrange an initial discussion, please do not hesitate to get in touch.

Please note: The value of investments and income from them can go down. You may not get back the original amount invested.


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