Building up capital

29 July 2019

5 questions about ESG investing

Those that consider sustainability important probably want to see that reflected in their finances. But what does sustainability mean in the context of investments? 5 questions and, importantly, answers about sustainable investing or ESG investing.

1. What exactly is socially responsible investing (SRI)?

A simple definition of SRI is that the ecological, ethical and social impacts of your investment are included in your assessment criteria. For one investor this will mean not investing in a company whose business activities have a significant environmental impact. Another will also prioritise the avoidance of companies that use child labour.

In recent years, investors have come to increasingly agree that it is not just environmental aspects or child labour that have to be considered, but the entire context of an investment. Currently, this holistic viewpoint is summarised in 3 letters: ESG. The term is a collection of criteria in the areas of environment (Environmental), society (Social) and good governance (Governance). But what is ESG Investing? Within the ESG framework, investment criteria include not just deforestation and air pollution, but a range of other aspects including: does the company pay its taxes? Does it respect the privacy of its employees and customers? Does it make an effort to increase the diversity of its workforce? 

2. How do I know if a company is sustainable?

Banks select sustainable companies based on exclusion criteria and other factors. ING does not invest for example in companies that violate human rights and animal welfare standards.

The bank also doesn’t invest in companies that produce controversial weapons (like cluster munitions or chemical weapons) or that cut down tropical rain forests. New coal-fired power plants and coal mines are also not candidates for investment. There are, however, other strategies to build a portfolio that uses ESG criteria beyond the exclusion of companies, sectors or countries.

One simple way to invest sustainably is to do it through a sustainable investment fund. The fund manager does the work for you: using a definition of responsible investment and certain sustainability criteria, they select the shares and/or bonds from which they expect the most potential. 

3. What kind of budget to I need to start ESG investing?

You don’t need a huge amount of capital to start investing. By opting for an intermittent investment plan you can start with an amount of €25 per month. With this approach, you regularly deposit an amount in a sustainable fund.

4. What about the return on ESG investing?

The overwhelming majority of research in this area has concluded that there is a positive link between the financial performance of companies and their ESG policy[1]. Moreover, these companies are apparently less volatile in general (this is the measure of agility of the markets).

Moreover, companies that choose a sustainable approach have a better chance of survival over the longer term. This is due to the fact that they are exposed to fewer risks. A company with a transparent purchasing policy has less chance of being involved in a bribery scandal. To name just two examples: organisations that innovate to reduce the ecological footprint of their factories can count on more support from their customers; and companies that engage with neighbours in order to prevent disturbance, have less chance of being protested against. The reason why ESG investing is considered a win-win solution is that it’s not just good for the environment and society, it’s good for the health of your portfolio as well.

5. Why is sustainable development getting more and more important for companies?

Those who engage with sustainability engage with the future because sustainability is the single, largest growth theme of the 21st century. If a company is excluded from sustainable investment funds it can have a negative effect on its share price. Companies affected in this way quickly become aware that sustainability is unavoidable.

Would you like to learn more?

[1]

Friede, Busch and Bassen. 2015. ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance and Investment.

https://www.tandfonline.com/doi/full/10.1080/20430795.2015.1118917#abstract