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Incorporating Environmental, Social and Governance factors into Investments

Savings & investment

13 September 2023


Imogen Hambly


Supporting responsible practices and contributing to a sustainable future

If you’re looking to ensure that your investments give you peace of mind while trying to reduce societal imbalances and promote positive environmental practices, Fairstone Portfolio Manager, Imogen Hambly, shares some tips on what you need to consider before selecting your portfolio of investments.

Environmental, Social and Governance (ESG) investing is a strategy that focuses on companies that prioritise environmental, social and governance factors in their operations. Investing in these businesses aims to support responsible practices and contribute to a sustainable future.

By focusing on companies that pay heed to these factors, investors can support sustainable businesses while enjoying the potential for superior long term financial performance.


The three elements of ESG:

Environmental: This criterion evaluates a company’s impact on the environment. Factors such as energy use, sustainability policies, carbon emissions and resource conservation are considered when assessing a company’s environmental performance. Companies with strong environmental practices often have lower associated environmental risks and demonstrate a commitment to reducing their ecological footprint.

Social: The social aspect of ESG investing examines how a company treats its employees and interacts with the communities in which it operates. Businesses prioritising employee welfare, workplace safety and community engagement are more likely to have a positive social impact and maintain a good reputation. Supporting companies with strong social values can promote fair labour practices and foster a more inclusive society.

Governance: Governance factors relate to a company’s leadership, management and overall corporate structure. Key considerations include executive compensation, audit processes, internal controls, board independence, shareholder rights and transparency. Companies with robust governance structures are more likely to be accountable, trustworthy and better prepared to manage potential risks.

By considering ESG factors in investment decisions, investors can support companies that demonstrate a commitment to long term sustainable growth, stakeholder alignment and strong governance. This approach allows investments to reflect positive values and can lead to long-term financial benefits, as ESG-focused companies are often better equipped to navigate evolving regulations, mitigate risks and capitalise on emerging opportunities.


Focused on best practice and strong governance

ESG factors are increasingly essential for investors when evaluating companies and making investment decisions. Investing in good-scoring ESG companies can allow for responsible investments without sacrificing returns. Numerous studies have shown that companies with strong ESG performance tend to outperform their counterparts with lower ESG standards.

As noted above, good ESG scores indicate that a company is focused on long term sustainable growth, stakeholder alignment and strong governance, which in combination can lead to long-term success and reduced risk exposure. These companies are more likely to show resilience through periods of market volatility.

On the other hand, businesses associated with low ESG standards are more likely be engaging in activities that cause significant environmental harm or are participating in unethical practices. These events not only lead to real-world negative outcomes, but they increase the risk of companies being subject to regulatory penalties, reputational damage and declining share prices.


Challenges of ESG Investing

ESG investing has gained significant traction recently as investors increasingly seek to align their portfolios with positive values. However, the varying interpretations of what makes an ESG leader and the rise of ‘greenwashing’ can make it challenging for investors trying to navigate this space.


Subjective nature of ESG

One of the main challenges of ESG investing is the subjectivity in evaluating companies based on their environmental, social and governance policies. What is considered a responsible investment for one person could be viewed as unethical by another. For instance, a sugary drinks manufacturer may have an excellent recycling policy, earning them high marks in the ‘E’ category. However, some investors might argue that sugary drinks are detrimental to society, making the company an unsuitable investment choice.

This subjectivity makes it difficult for investors to find a universally agreed-upon standard for determining whether a company or fund can truly be deemed responsible.


Threat of greenwashing

Another challenge facing ESG investors is the phenomenon of ‘greenwashing,’ where companies or funds market themselves as environmentally friendly or socially responsible when, in reality, they do not meet these standards. This deceptive practice can lead to investors unwittingly supporting businesses that do not align with their values.


Navigating ESG investing challenges

Despite the challenges posed by subjectivity and greenwashing, the incorporation of ESG factors into investment decisions remains an essential tool for those who wish to align their financial goals with positive outcomes and/ or personal ethical values.


To successfully navigate the ESG landscape, we would encourage investors to:

  • Clearly define their values and priorities when it comes to Environmental, Social and Governance issues – do investments solely need to reflect best practice across the three areas, or are there also certain segments of the market that need to be avoided.
  • Talk to an independent financial advisor or an investment specialist about how specific ethical values and exclusions can be incorporated into a portfolio, and the effects these could have on potential returns.
  • Understand the options available – Fairstone offers ESG-aligned portfolio solutions covering a number of different sustainability linked goals.
  • Remain cognisant of changes within the market and within companies themselves. We live in an evolving world and what was an ESG laggard of yesterday could be a leader tomorrow.

By taking these steps, investors can better ensure that their investment choices align with their personal values and contribute to a more sustainable and socially responsible future.

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