OVER the past few years there has been a sea-change in responsible investment, with much more awareness of ethical considerations.
Nowadays when we look at an individual stock, we look at its ESG rating as a matter of course. ESG stands for environmental, social and governance, and these factors are now used alongside traditional financial analysis in order to enhance risk adjusted returns of investments.
It is a way to have a real impact on society and the influence as investors is significant: engaging with companies means that there is pressure to minimise any negative impacts and work to contribute towards a sustainable society.
Environmental considerations have surged in recent times and have raced up the political agenda. For a company, environmental criteria consider how it performs as a steward of nature and this might include its energy use, waste and pollution as well as natural resource conservation. Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates. Again, this is something that has come to the fore more recently, with damning headlines for those who do not show regard for such considerations.
Governance has long been a target for scrutiny: accurate and transparent accounting, for example is a high-profile factor and it is vital that companies can demonstrate this.
ESG investing has surged in recent years, with many more responsible funds available and much more information on individual companies. Gone are the days when ethical funds were a slightly maverick group, expected to underperform the main market and certainly unlikely to be able to deliver any form of income.
Now a number of investment houses offer a range of responsible funds and they have performed well over the past couple of years. There is probably a sustainability premium in such funds and certainly fewer controversies.
They include companies with better stakeholder relationships and often have more resilient and more conservative balance sheets. Following ESG criteria may ensure investors avoid companies whose practices could signal a risk factor.
There has been a huge surge in demand for “new economy” stocks – witness the dizzy heights reached by Tesla, for example.
There has also been a revolution in alternative energy: many more investors now question the wisdom of investing in fossil fuel producers rather than wind or solar power and with so much government encouragement (and material support in the form of grants) it seems an obvious route for investors.
How to gain exposure to responsible investments is much easier than it used to be. ESG ratings, for example, for individual companies are much more readily available and there is a whole raft of collective funds ranging from sustainable to responsible to positive change and there are still some ethical funds too.
Such funds can be industry specific, concentrate on a geographic region or indeed offer a much broader remit.
One thing is for sure, the emphasis on responsible investment is not going away and is likely to play a significant role going forward.
:: Cathy Dixon is a partner at the Belfast office of Smith & Williamson Investment Management. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.
