Sustainable and responsible investing: how do I start?
Interest in sustainability has soared recently. It also means opportunities for investors. But where exactly should you begin? And how do you make the ‘right’ choices?
What is ESG investing?
Return versus risk, prospects for growth, dividend policy… for a growing group of investors, it’s not only business statistics that are important. Non-financial aspects also help them make choices about their investments. The climate change problem is a crucial part of it, but sustainability goes further than that. At ING, we look at the total package, which is best defined by ESG. The term is a collection of criteria in the areas of environment, society and good governance. ESG investing is not just about environment, it’s also about how the employees, suppliers or customers are treated, and about the management practices of the company or a country.
Examples of ESG themes
Climat change and carbon dioxide emissions; air and water pollution; biodiversity; ...
Customer satisfaction; data management and privacy; diversity; ...
Composition of the Management Board; bribery and corruption; management salaries; ...
Strategies for Investors
1. Exclusion or restriction
An investor can choose not to include certain companies or countries in their portfolio. This investment strategy may concern specific companies or countries that don’t respect human rights, but it can also be about particular sectors such as the weapons or tobacco industries.
This principle is used by the investor to select assets with the best ESG performance in comparison with others in the same sector. For this, the investor makes use of a scoring system in which no company or country is excluded. Such a strategy may result in an investment in a polluting company, but only on the condition that it has the best ESG score in their sector.
3. Active shareholdership
Shareholders can enter into dialogue with a company to influence the decisions made around ESG issues. They can make use of their voting rights or ask questions during general meetings.
4. Thematic investing
This strategy involves the investor acting on particular ESG trends, such as clean energy.
5. Impact investing
In addition to financial objectives, impact investing sets clear social and environmental goals. Impact investors want to have an influence on social and environmental issues and actively engage themselves in the measuring and reporting of them.
6. ESG integration
ESG Integration means that the investor’s decision process involves weighing up the ESG risks and opportunities in a systematic way. Users of this investment strategy are conscious that ESG issues also carry risks, and so can exercise their option to take the risk, or not. Of course, ESG also offers opportunities and an ESG analysis can help to identify them.
It’s also important to realise that these six strategies do not exclude one another. In fact, they are often employed in combination. So ESG investing can be carried out in a variety of ways.
And the return?
The vast majority of studies conclude that there is a positive link between a company’s financial performance and their ESG score. A few years ago, a large survey of 2,200 research projects took place that looked at the relationship between ESG and financial performance. 90% of the research failed to uncover a negative relationship and the overwhelming majority found a positive link. A recent study by MSCI also found a positive relationship between the ESG score and profitability. What’s the bottom line? Sustainable investing is not only good for the environment and society, it’s also good for your own portfolio.
How exactly do I start?
A simple way to start investing is via a sustainable and responsible investment fund. A fund invests tens of hundreds of shares and/or bonds simultaneously, which is always easier than buying shares and bonds individually. Moreover, the fund manager does the work for you: using particular sustainability criteria they select the shares or bonds that show the most potential.
Thinking about getting into sustainable and reponsible investing?
 Friede, Busch en Bassen. 2015. ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance and Investment.
 Guise G., LE Lee, D. Melas, Z. Nagy, L. Nishikawa. 2017. Foundations of ESG investing. Part 1: How ESG Affects Equity Valuation, Risk and Performance. MSCI.