What ESG investing is, and why I recommend it

As investors worry that they’re supporting companies that damage the earth, I look at the increasing demand for ESG investments.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s clear the planet is suffering, and industry is largely to blame. We’ve recently witnessed environmental destruction all around us. Recent news headlines include ‘Bush fires, hailstorms, dust clouds and flooding in Australia’, and ‘Extreme blizzards and storms in Canada’. With this knowledge, investors worry that they’re helping enable the companies implicit in damaging the earth.

Ethical investing, sustainable investing, socially responsible investing, or impact investing. Each of these describes the same thing; a way to invest your money in assets that make the world a better place.

Environmental, Social, and Governance (ESG) sum up the factors used to measure the sustainability of a company. ESG also tests the societal impact of your investment in a company or business.

Investments in ESG funds rose 233% in 2019, from £3bn to £10bn, so it’s clear ethical investing is in demand.

Pledging to reduce carbon emissions

The World Economic Forum in Davos this week is urging delegates to set net-zero emissions goals by 2050 at the latest.

Companies are already getting on board with pledges to reduce carbon emissions.

Last week Microsoft announced an ambitious goal to become carbon negative by 2030. This coincides with its pledge to remove historical carbon emissions by 2050. This refers to every ton of carbon it has ever emitted into the atmosphere over the past 45 years. It’s also launched a $1bn climate innovation fund.

This sets a new benchmark for companies assessing their climate goals and it’s a tough act to follow.

Profit from your principles

Main UK brokers such as Hargreaves Lansdown and Interactive Investor are now providing information and routes to investing ethically. Actively managed ESG funds can cost investors more in fees but can help clarify motivations for building an ESG portfolio. 

The Task Force on Climate-related Financial Disclosure (TCFD) sets guidelines for companies to follow. However, there’s not a universal standard for ESG metrics, so it makes choosing companies more difficult. BP is involved in renewables and proactive in promoting diversity, but it can’t escape the fact it’s an oil company damaging the environment.

UK pension schemes are under immense pressure to divest from fossil fuel investments.

Local Government Pension Scheme (LGPS) Central covers nine local authority pension funds in the UK. Last year it launched the All World Equity Climate Multi-Factor Fund. This fund tracks the FTSE All-World Climate Balanced Comprehensive Factor Index. It attracted pension assets of £2.1bn and considers carbon emissions, green revenues, and fossil fuel reserves. 

As positive as the move is, it’s not a simple solution for all UK pension monies. Some British pension funds warned they would have lost more than £600m if they’d divested from fossil fuels last year. However, that’s from funds worth billions of pounds, so is this really a cost worth quibbling about?

Climate change is real

Last year was the earth’s second hottest since records began and the U.N. World Meteorological Organization expects more extreme weather events to come.

There is a growing global demand from investors for ESG integration, portfolio decarbonization, social impact funds, and low carbon strategies.

The pressure is mounting on companies to take a responsible stance towards the planet. This should increase the investing options available to ESG funds. I think it’s a good time to get on board as the acceleration in demand for ESG investing will only intensify.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

2 FTSE 100 stocks I’d buy as the blue-chip index hits record highs

This Fool takes a look at a pair of quality FTSE 100 stocks that appear well-positioned for future gains, despite…

Read more »

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »