Over the past few years, there has been a growing demand from investors who not only want investment growth but also want to see the companies and funds they invest in providing benefit to the environment and communities. Known as ESG – Environmental, Social, and corporate Governance – the market is awash with claims of ESG friendly investments.
In fact, the sector has been one of the fastest-growing, and this trend has accelerated dramatically during 2020. However, there are concerns about how effective ESG principles are in truly improving and supporting communities and environmental issues. The colossal scale of demand means that there is a growing mismatch between demand and the availability of suitable investments.
There is no clear standard for ESG investments and the criteria across different investment houses can vary wildly. This lack of consistency means that it is not always clear how fund managers select their investments.
Greenwashing has been highlighted as a potential problem for fund managers and investors. Greenwashing is the practice where companies overstate or even provide misleading information in respect of their ESG activities and environmental principles to gain investors.
This clearly adds an additional layer of complexity for investors who wish to incorporate ESG principles into their portfolio as they run the risk of investing in companies who are simply making a token effort to appear as though they are engaging in these activities.
The European Union has now put forward plans to introduce performance thresholds and minimum safeguards linked to green initiatives and ESG practices. This means that, by the end of 2021, European ESG fund managers will need to show what measures were followed to ensure that investment companies meet these guidelines and regulatory standards. This should give investors a greater level of certainty when selecting investments in line with these principles.
Although this regulatory momentum is being led by Europe, the increasing global demand is forcing many US companies to follow these principles.
At Foresight Wealth Strategists we are constantly researching new trends in the marketplace to deliver the best outcomes for clients. This growing class of investments is of great interest and we have identified a broad range of investment styles. These range from those that simply screen out the worst offending companies, such as oil, tobacco, and arms, to those that are focused on companies that exhibit the strongest commitment to environmental and social benefit.
ESG is a welcome addition to the investment landscape. However, it is clear that this is a highly complex space and investors should be wary of diving into investments just because they appear to have ESG credentials.
This type of investment requires extensive due diligence to ensure they truly do what they say. As greater levels of regulation and standardisation are introduced, investment managers will be more able to quantify the scope and style of ESG principles for investors.
If you would like to incorporate ESG principles into your investment portfolio then please contact us and one of our expert Wealth Strategists will be pleased to guide you through this complex market and help you select the most suitable investment strategy.