What are ESG Investments?

Article by Christina

The current buzz word in financial circles seems to be ESG. But what does it mean?

ESG stands for environmental, social, and governance-based investments. Sounds good doesn’t it. Who wouldn’t want to invest in companies that didn’t do any environmental or social harm, or indeed those that could demonstrate good governance?

An estimated £250 billion was invested into ESG funds in 2020.

Is it as simple as looking at companies who have a “good” or perceived climate record and disinvesting from those with “bad” records like oil companies for example? Well perhaps it’s not that simple because there are always trade-offs to be considered. Like nuclear energy, which is clean and low carbon, but creates its own problems with disposal down the line. Then there’s the tensions between the E, the S and the G themselves. Take big tech companies. On the face of it they seem environmentally friendly but what about their governance in terms of tax. Many of them have a really poor record on tax payment which brings into question both their sustainability and their governance.

Then there’s the question of what to invest in? Did you know that the United Nations has 17 separate sustainable development goals? That in itself creates a serious challenge in terms of balancing investments. Also, most companies are in the process of improving their green credentials, so how can you be sure that if you disinvest today, the companies you’ve left won’t become the cleanest tomorrow?

Then of course there is the question of investment returns. How far are you prepared to go in terms of potentially losing investment value in order to pursue your ideals?

You might also ask how can you be sure that these “goals” are actually being met?

There are still some issues with ESG data and its reliability. The sector is currently working on improving data output because investors want to know exactly how green their investments really are right down to knowing how they are reducing carbon emissions for example and by what amount.

But do people even understand what ESG investments are?

Well. King Financial Planning have surveyed clients to find out.

Perhaps unsurprisingly the survey found that 60% of clients had “no idea” what ESG was or meant and only 11% were actually clear about what ESG investments were. When it was explained, 50% said they would be interested to know more but 45% said straight away that wouldn’t be interested in ESG investing if it involved higher charges. Only 14% said they would be prepared to switch all their investments into ESG funds.

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