29 July 2019
What makes ESG investing an attractive option?
Climate change, human rights, diversity… It’s not only activists who are striving for a better world. As consumers, we are making more considered choices, more often, and it’s also a factor when it comes to our investments.
At the supermarket, do you usually use a bag-for-life or a plastic bag? Would you prefer to holiday by plane or train? And are the bananas in your fruit bowl Fairtrade or generic? However insignificant they appear to be, the choices we make have a crucial impact at both social and ecological levels.
Companies also have a role to fulfill when it comes to countering social and ecological challenges. Their choices, for instance about using recyclable packaging, developing more sustainable products and services, or having a fair wages policy, are important.
Sustainable company policy is not only good for the planet, it’s good for the company itself. Companies can not only stand out from competitors, they can also increase their profitability by listening to changing consumer expectations.
Companies that are more economical with raw materials can count on more goodwill from their customers. Satisfied employees mean less sick leave and higher productivity. And companies that conduct business ethically lower their chances of being involved in fraud scandals. The skills that enable businesses to adapt to these developments are the same skills that will, in part, determine their future achievements.
What about investments?
This trend has also spread to the world of investment, where ethical investing is no longer a niche activity. These days, many investment firms offer solutions for sustainable and responsible investing. There has been an increase in:
- the number of fund managers using the United Nations recommendations on responsible investing to help them make choices
- the number of stock exchange listed companies publishing ‘socially-responsible’ annual reports
- the managed assets of sustainable investments for both private and institutional investors.
In the early days of ethical investing, the drive to place money in responsible investments was linked to a personal conviction to do good for the environment and humanity. More recently, it has become increasingly clear that large social and ecological challenges will have an impact on investments. That’s why investors also need to understand the risks regardless of whether or not they invest responsibly. Certain sustainability criteria have already become widely used as evidence for buying or selling an investment.
What is ESG investing?
ESG investing means assessing the sustainability of a company based on its ‘ESG’, which stands for environmental, social and governance.
- Environmental is focused on the involvement of companies in the area of environmental protection
- Social refers to the relationship that a company has with its employees, suppliers, customers and other parties with which it has relationships
- Governance concerns the management of a company, the remuneration policy of a company and good governance.
There are various strategies for building a portfolio based on ESG criteria.
- One is to exclude companies that are active in controversial industries (such as weapons, tobacco and coal).
- Another is to choose ‘best-in-class’ investments: companies with the best ESG scores compared to their competitors in a certain sector.
- Most investment funds combine different approaches. More information about the different strategies for sustainable investment.
|Environment (Environmental)||Relationship with external parties (Social)||Management issues (Governance)|
Sustainable and responsible investment = sustainable return?
Investments that respect people, the environment and society continue to face a stubborn prejudice: that these values come, literally, at the cost of financial return. This is a misconception.
Studies conducted over the last 20 years show that the application of ESG criteria do not influence stock market performance. The vast majority even found the relationship between sustainability and return to be a positive one. In other words, SRI (Socially Responsible Investing) investments achieve a potentially equivalent return while at the same time making a positive contribution to the environment and society.
Why ESG investing? At ING, we think that the impact of sustainability criteria is set to become increasingly important. We are confronted on a daily basis with the reality of climate change, health issues, insecurity, food scarcity, population increase, amongst other challenges. Companies or countries that are able to offer a sustainable response create value. These organisations are looking not only at short-term profit, but also at impacts over the longer term. Companies that fail to take these issues into account can be seen to be a (higher) risk. It remains crucial to apply a rigorous and structural selection process, just as with classic investing.