Jargon can dominate investing and a lack of understanding can hinder good decision making. In this piece we share a simple explanation of ESG Investing.
The use of three-letter acronyms is not unique to investing. In fact, one of the most universally used acronyms of 2021 must have been PCR, as shorthand for the diagnostic test for Covid-19. Very few people likely know it stands for ‘polymerase chain reaction test, much less refer to it as that, yet they know what it refers to in conversation.
The same cannot be said for acronyms in the world of finance and investments, which are often used as if they are universally understood – almost certainly to the detriment of investors. In recent years, one acronym, in particular, has gathered momentum – ESG. According to Google Trends¹, searches for the term have more than quadrupled in the UK over the past five years.
The truth is, Environmental, Social and Governance criteria are not new to investing but they have been referred to under various other guises in the past. Socially responsible investing (SRI), responsible investing (RI), sustainable investing, and (less frequently) impact investing, are some of the most common terms used interchangeably with ESG.
Working towards common terminology
The variety of terms is part of the reason confusion abounds. Different parties use different words to convey very similar information, so it is no surprise that investors are still not much the wiser.
Last year, the EU moved to tackle this grey area by putting in place rules collectively known as the Sustainable Finance Disclosure Regulation (SFDR). These aim to clarify what constitutes a sustainable or ESG-aligned investment product or strategy, and put categories in place to ensure all funds sold in Europe are working under the same framework. Yet uncertainty still reigns, according to the Securities and Markets Stakeholders Group, which represents investors and issued a report to the European Securities and Markets Authorities saying as much at the beginning of this year.²
Since the UK had left the EU by the time the regulation was implemented (March 2021), funds sold solely in the UK do not currently have to align with SFDR. However, as many fund groups sell investment products in Europe and the UK, they have been getting to grips with the new rules regardless.
Additionally, it is widely expected the UK regulator – the Financial Conduct Authority – will issue its own ESG rules which broadly align with the EU’s.
Catering to different investor needs
In reality, there is no single definition of ESG investors because for investors too it means a variety of things. For some, it means ‘doing no harm’ from an environmental, social or governance point of view with their investments. For others, it focuses on investing in the companies that are ‘best-in-class’ within their respective industries and doing less damage than their peers. Yet others would like to see demonstrated the positive impact their investments are making, in quantifiable ways, to improve the world.
According to research from the Investment Association³, the approach to this historically niche area of investing is maturing. Asset managers are incorporating ESG factors into their investment process with the aim of managing risk and increasing returns. In fact, 81% of asset managers who responded to the 2021 ESG Global Survey said they were adopting this integrated approach.
Perhaps we will never reach an agreed definition of ESG, and maybe that is to be expected. As with risk appetite and investment objectives, we need to be able to cater to a spectrum of investor needs. The most important thing, then, is communicating clearly with investors to inform them of your interpretation of ESG, and to see whether you can truly accommodate and service what they are hoping to achieve.
At Church House, we have always considered that investing in companies with properly sustainable practices and business models and run by people with integrity as an integral part of what we do. We look to invest in companies which demonstrate a strong willingness and determination to carry out positive ESG practices and ultimately guide companies along the path to create a more sustainable and environmentally-friendly society.
We have created our own checks, which form part of our investment process, discussing ESG issues in our daily investment team meetings. An important part of this is ongoing engagement with companies in order to drive positive changes in ESG practices. Our commitment to an investment process that recognises the value of ESG qualities, when selecting companies for our range of investment funds, can be evidenced by our status as a Signatory of the 2020 UK Stewardship Code from the Financial Reporting Council (FRC).
We recognize that the materiality of ESG issues and opportunities vary by company and sector, and view ESG as a positive risk mitigator. This promotes investment in high-quality businesses, having a positive effect on company fundamentals and the long-term interests of shareholders, as well as the wider community and environment.
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment decisions. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.