News & Views

ESG is the new acronym in Asset Management

6th June 2019

As the rise in growth of impact investing continues apace, then so do the acronyms associated with all asset management.  The latest to gain traction is ESG; environmental, social and governance. Active investors are now demanding that companies such as Amazon, JP Morgan and BP consider ESG issues more seriously such as gender diversity, climate risks and the use of artificial intelligence.

What is interesting is that the demand is coming from the bottom up and businesses and asset managers are having to respond accordingly.  The demand is also being fuelled in some cases by other initiatives such as the Principles for Responsible Investment, backed by the United Nations that promotes the inclusion of environmental, social and governance factors in asset allocation. The European Commission is also actively trying to channel more capital into sustainable funds by incorporating ESG principles into key regulations and forcing fund managers to show how they integrate them into investment processes.

Of course, not all countries take the same view. In America, President Donald Trump’s scepticism about climate change means there’s no federal support. Indeed, the Department of Labor last year said fiduciaries should “not too readily treat ESG factors as economically relevant.”

So, is it all Good News?

In general, it has to be a step in the right direction, but it is still very early days to assess any real impact on investment performance. Establishing the right criteria for ESG and then determining a common way of measuring it is currently a challenge. Until a universal measure is found then it will still be open to scrutiny and throw up contradictions such as The Dow Jones Sustainability Europe Index including cigarette purveyor British American Tobacco and oil giant Royal Dutch Shell featuring in Vanguard’s SRI European Stock fund.

What’s the difference between ESG and Impact Investing

A growing number of investors want to see their money go toward stocks or funds that are both profitable and reflective of their social values. Three styles of investing fulfil this: Environmental, social and governance (ESG), socially responsible investing (SRI) and impact investing.

  • ESG looks at the company’s environmental, social and governance practices, alongside more traditional financial measures.
  • Socially responsible investing involves actively removing or choosing investments based on specific ethical guidelines.
  • Impact investing looks to help a business or organization complete a project or develop a program or do something positive to benefit society.

While there is an element in crossover with some of the above, it does give the investor a degree of choice as to the level of their ethical investment strategy.

If you would like to discuss any of the above with Andrew Hannay then please click on the link to arrange a meeting.