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ESG: Investing with Impact

The value of an investment is no longer just about returns. An increasing number of investors are also calling for their money to make a positive impact on society and the world at large. About half of investors currently own responsible investments, and about the same number would be willing to convert their entire portfolio to be responsible, according to a recent survey — which also showed that the desire to invest ethically is especially pronounced among millennials. Implementing that desire however may be no easy task, given the growing complexity of investment concepts and products catering to this sector.

The story of ESG investing began in January 2004 when former UN Secretary-General Kofi Annan wrote to over 50 CEOs of major financial institutions, inviting them to participate in a joint initiative under the auspices of the UN Global Compact and with the support of the International Finance Corporation (IFC) and the Swiss Government. The goal of the initiative was to find ways to integrate ESG into capital markets. A year later this initiative produced a report entitled “Who Cares Wins,” with Ivo Knoepfel as the author. The report made the case that embedding environmental, social and governance (ESG) factors in capital markets make good business sense and lead to more sustainable markets and better outcomes for societies.

Environmental, Social and Governance (ESG) investing relates largely to the internal operations of a company and the nature of their products. The concept sets out to find companies that are acting in an ethical and responsible manner at board level which is then transferred throughout the organisation and the wider business, having a material impact on the performance of the investment. While there is an overlay of social consciousness, the main objective of ESG valuation remains financial performance. More advanced ESG Investing can include the adding of filters in a screening process that seeks out companies taking care to ensure their business processes are highly ethical and that they operate in responsible supply chains.

Below is a list common ESG factors that are considered. Investments with good ESG scores have the potential to drive returns, while those with poor ESG scores may inhibit returns.

1.Environmental: Energy consumption, Pollution, Climate change, Waste production, Natural resource preservation, Animal welfare

2.Social: Human rights, Child & forced labour, Community engagement, Health & safety, Stakeholder relations, Employee relations

3.Governance: Quality of management, Board independence, Conflicts of interest, Executive compensation, Transparency & disclosure, Shareholder rights

After extensive research across ranging ESG factors, in 2020, Ethisphere compiled a list of the world’s most ethical companies. 131 companies in total were recognised in 21 countries spanning 50 different industries. Four UK companies made the grade and have been recognised for setting the global standards of business integrity and corporate citizenship, these were — Aptiv (automotive), Arm (electronics), National Grid (energy) and NWG Living Wates (utilities).

Companies are recognising the importance of ESG factors and now more than ever are working towards improving them to increase their attractiveness to investors

Today, the UN-backed PRI Principles for Responsible Investment (PRI) is a thriving global initiative with over 1,600 members representing over $70 trillion assets under management. PRI’s role is to advance the integration of ESG into analysis and decision-making through thought leadership and the creation of tools, guidance and engagement.


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