We are all becoming increasingly aware of the effects of climate change and its impact on the planet and society. 2023 was the warmest year since global records began in 1850, a trend continuing into this year with March confirmed as the warmest in modern times, the tenth monthly record in a row. While this is exacerbated by the El Niño weather event, the main factor is human-caused climate change.
We face daily choices – how much plastic we waste, electricity usage, reducing our carbon footprint etc. Small steps to do our part for the environment and society.
We can make choices when investing too, by opting for companies which don’t contribute to problems like climate change, inequality etc and have strategies to control the risk – responsible investing. It’s not just about the environment, but also social impact.
If you are starting to look into this, it can be confusing, not least because of the different terminology. There’s ‘ESG investment’ which stands for environmental, social and governance issues, ‘responsible investing’, ‘sustainable investment’ and now also ‘impact investing’. Don’t let this put you off, they all share a common philosophy and your adviser will guide you through it.
ESG definitions
This type of responsible investing prioritises financial returns alongside a company’s impact on the environment, its stakeholders and society. Here are some definitions:
- Environmental – The impact of a company’s activities on the environment: carbon footprint, greenhouse gas emissions, renewable energy usage, sustainable supply chains etc. Positive outcomes include managing resources and executing environmental reporting/disclosure or minimising environmental liabilities.
- Social – A company’s impact on its employees, customers, consumers, suppliers and local community: how employees are treated, racial diversity, LGBTQ+ equality, inclusion programmes etc. Positive outcomes include increasing health, productivity and morale, or reducing outcomes like high turnover and absenteeism.
- Governance – The way companies are run: how does the management drive positive change? What are its business ethics? Positive outcomes include aligning interests of shareowners and management, improving diversity and accountability, and avoiding unpleasant financial surprises.
In summary, ESG investing considers how a company serves its staff, communities, customers, stakeholders and the environment.
Increasing popularity
Interest in ESG/responsible investment is growing noticeably. Investors are placing greater emphasis on the environmental and social impact of their investments, wanting to make sure the firms benefiting from their capital are well governed, socially conscious and not unduly harming the environment.
They are increasingly seeking to manage exposure to ESG factors, while generating sustainable long-term returns – responsible investing and performance can be complementary.
Survey findings published by Morgan Stanley in January 2024 found that “more than half of individual investors say they plan to increase their allocations to sustainable investments in the next year, while more than 70% believe strong ESG practices can lead to higher returns”.
Performance vs impact
Investing responsibly doesn’t mean that you have to sacrifice returns.
You can take a more philanthropic approach if you wish, by investing in companies that prioritise their social impact over profitability – but this is just one end of the spectrum. At the other end are investments which put profit first over impact, with ESG strategies focusing on how an organisation manages risks and opportunities around sustainability issues.
In the middle, we have ‘profit with purpose’, where you invest with the intention of generating positive, measurable social and environmental impact alongside a financial return – often called ‘impact investing’. And as more investors seek tangible outcomes, impacting investing is emerging as a resilient and future-proof choice.
Investment planning
What does all this mean for you as a private investor? It can get confusing, but you do not need to spend hours researching a company’s ESG track record, or comparing its share price with other companies, to work out which to invest in. As with other capital investments, you can buy funds which invest in highly rated companies. This also reduces risk by providing more diversification.
Apply the same investment principles as with other capital investments:
- Establish your objectives and time horizon.
- Obtain an objective analysis of your appetite for risk.
- Have a mix of assets and sectors in your portfolio to reduce risk.
- Analyse how a new investment would fit in with the rest of your portfolio and risk weighting.
- Conduct regular reviews.
You can choose to use a financial advisory company that incorporates responsible investing within its advisory services. Indeed, a responsible adviser should look at your ESG preferences alongside traditional assessments when evaluating suitability of investments for clients.
Responsible investing does not have to involve more work on your part, and you can invest as you normally would, without compromising returns or your risk weightings – but with the difference being which companies benefit from your investment capital.
This article should not be construed as providing any personalised investment advice. The value of investments can fall as well as rise, as can the income arising from them. Past performance should not be seen as an indication of future performance.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
By Adrian Hook
|| features@algarveresident.com
Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).
www.blevinsfranks.com
