As environmental, social, and governance (ESG) issues have gripped the news cycle over the past few years, they have also slowly begun to influence the way people invest.
In a world in which climate change, social equality, and organisational reform are hot topics, many investors have started to align their portfolios with investments that match their own closely held values and beliefs. This has involved pursuing investments that fit and adhere to ESG criteria.
Read on to discover what ESG investing entails and four important trends to look out for in 2023.
ESG investing has helped investors align their portfolios with their values
An ESG fund is made up of businesses that have fulfilled certain criteria focused on key environmental, social, and governance issues.
These non-financial factors help determine if an investment or company is being run in a sustainable and ethical manner.
ESG investments tend to focus on businesses who make a positive impact when it comes to the following areas:
The main driving force behind ESG investing is that it puts your values and goals at the forefront of your investment choices. It holds the companies you invest in accountable to ethical criteria and pressures them to be mindful of their practices.
It can also help protect your investments from mismanagement — which could see their value decline in the future if something became public — and is a sector that has seen considerable growth over the past few years.
In the UK, ESG investing has seen significant growth in recent years, with Growth Capital Ventures reporting that, between 2018 and 2021, ESG-compliant start-ups saw a 127% increase in investment.
4 important things to look out for with ESG investing in 2023
1. Defining an ESG investment will become clearer as work is done to reduce “greenwashing”
Moves by investors to push the importance of ESG criteria is noble and has helped apply pressure to the business world to ensure company practices remain above board. It has contributed to social and environmental issues becoming increasingly important within the workplace.
However, some firms have co-opted ESG’s vague nature to give the appearance of aligning with ESG values, while not actually putting the work in to meet the necessary requirements.
Terms like “sustainable” or “responsible” can help a business sound ESG-compliant without really defining what it is they are doing. Without clear definitions being in place, it can be easy for unscrupulous firms to “greenwash” their business practices and imply they are ESG-friendly, while doing very little of value to actually boost ESG concerns.
This can make it hard for you to ensure your investment truly lines up with your values.
Fortunately, the Financial Conduct Authority (FCA) is helping to develop new rules which seek to protect investors from these issues and ensure ESG criteria is better defined in the future.
2. Data will become a greater factor in measuring ESG success
According to a study cited by Nordic Capital, some of the most significant ESG-related challenges that companies face are not having enough data (47%) and an inability to validate and trust said data (46%) when establishing the veracity and outcomes of ESG claims.
So, there is a lot of pressure on the ESG industry to improve data recording methodology. In turn, this could help investors review the hard facts behind a firm’s claims and measure how their investment might continue to hit ESG targets in the future.
3. ESG reporting will become more standardised, allowing investors to easily compare different investments
In a similar fashion to how more refined ESG definitions and a greater array of data will likely help investors make better ESG investing decisions in the future, standardised reporting could boost investors’ ability to compare the worth of their different ESG-compliant investment opportunities.
Currently, many firms choose to publish corporate sustainability reports that typically contain information about their ESG initiatives. However, the way companies gather and assemble this information can vary significantly from business to business.
The Saltus investment team have strong relationships with sustainable fund managers and carry out the necessary due diligence to understand how organisations are approved for investment.
This ensures companies are meeting an appropriate level of environmental and social performance and are being well managed. Fund managers also have a higher level of engagement to drive change within organisations where required.
Calls for a more unified and consistent reporting method are gathering pace. If a regulator or industry body established a simplified ESG-industry reporting standard, it could make it far easier for investors to ensure any opportunities they are assessing are truly aligned to their core values.
4. The global energy crisis is pushing a quicker transition to greener energy solutions
A leading topic at the recent COP27 was energy transition, or the global movement away from fossil fuels towards more sustainable, renewable energy sources. The current global energy crisis has pushed this topic to the forefront of many nations’ agendas.
One of the ways ESG investors have struggled in the past year is the surge in value of traditional energy stocks, such as oil and gas, due to the crisis and the shortages caused by global issues like the war in Ukraine.
However, a continued transition to renewable energy sources is likely to present increasing opportunities for investors to align themselves with eco-friendly investments. This could help them leave a mark on the environment while also boosting their portfolios.
Get in touch
ESG issues are becoming increasingly important for investors. If you are interested in reviewing your portfolio and seeing if there are opportunities to better align your investments with your core values, please do reach out to us to discuss.
Please email us at firstname.lastname@example.org or call 0117 214 0870.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.Back to Our Insights