An introduction to ESG investing

Investors’ desire to invest more ethically has made the investment management world sit up, take notice, and create sustainable investment products that meet their needs. 

This means that whether you’re managing your own pension pot or simply want to invest some of your savings, you’ve got more choice than ever to grow your money responsibly.

How easy is ethical investing? 

Previously, ‘ethical’ investments were a niche area, seen as a ‘nice to have’ add-on to an investor’s portfolio, based on the idea that while investing in a more socially aware way was a good thing, it wasn’t a priority.

However, in recent years so-called ‘ESG’ investing has become mainstream, resulting in a greater choice of investment funds tailored to those who want their money to grow while benefiting wider society.

Large fund managers speak publicly about the behaviour they expect from the companies in which their clients’ money is invested. 

For example, the chief executive of BlackRock, one of the world’s largest asset managers, writes a public letter to the bosses of publicly traded companies each year to lay out the behaviour that it expects from them.

What does ESG stand for?

Let’s start with the basics. Ethical investment can be interpreted in quite a loose way.

The umbrella term ESG emerged as a more specific way for investors to put their money in companies and funds that take notice of the Environmental, Social and Corporate Governance (ESG) factors when doing business. 

Here are some of the questions that ESG investors can ask when researching whether a company or investment fund can describe itself as an ESG investment.

E is for Environmental

• Does the firm take account of its carbon footprint?

• Does it use renewable energy, including wind or solar?

• What are its recycling or safe waste disposal practices?

• Does it use or create green products, technology, or infrastructure?

S is for Social

How does the firm treat its employees?

• Does the firm have a broader mission or social purpose?

• Does it manage its supply chain sourcing to ensure workers are treated humanely? 

• How does the firm treat its customers?

G is for Governance

• How does the firm decide on remuneration, bonuses and perks for its senior managers?

• Are pay incentives tied to longer-term business goals rather than just earnings per share?

• How diverse is the company’s board of directors and management teams?

• How transparent is the firm when it communicates with its shareholders?

The above lists are by no means exhaustive, but they give a sense of what investors need to think about when determining whether an investment can be described as an ESG or ethical choice. 

Choosing the right ESG investment

It’s important to be aware that the metrics that the wider investment industry uses to determine whether a firm can be described as an ESG investment can sometimes be quite subjective. 

You must do your own research to determine whether an individual company or investment fund matches your values.

When examining investment funds to work out whether they meet the ESG criteria most important to you, it can be a good idea to check where each fund invests its clients’ money.

You can use websites like Morningstar and Trustnet to find out a fund’s top ten holdings.

Once you’ve done this, you can also check how much of its portfolio consists of social or environmental investments. 

Doing these two things should give you a basic idea of whether that fund fits your idea of an ethical investment.

This can be a bewildering and complex process, so do not be afraid to get professional regulated financial advice to help you make the right choice for your investment goals.

Speaking to a specialist independent financial adviser (IFA) may be a good way to help you decide how best to meet both your financial and personal goals when it comes to picking sustainable, socially responsible investments.

Where to go for financial advice.

How do you want to invest?

Once you’ve developed a broad idea about where you want your money to go, you can approach the practicalities of ESG investing in the same way as you would any other kind of investment.

Investing in a tax-efficient way

Start by working out how to invest in the most tax-efficient way possible. One way of doing this is to place the money in a Stocks and Shares ISA. These let you enjoy returns from investment growth and dividends tax free.

Are you an experienced, active investor?

If you’re confident in managing your own investments, you might want to look at picking company stocks individually. To do this properly, you’ll need to be sure that you can take the time necessary to regularly keep track of how your investments are performing and make changes to your portfolio if required.

Another option is to buy specialist ESG funds that spread your money across a selection of companies. This spreads your investment risk while hopefully ensuring that your money still ends up in areas that are acceptable to you.

Comparing investment accounts

Online and investment platforms

You may have heard of some of the big-name brokers that offer online investment platforms. They include AJ Bell, Hargreaves Lansdown, IG and Interactive Investor. But bear in mind that these platforms are largely ‘execution-only’. 

This means that they allow you to set up an account to buy and sell investments like stocks, bonds and funds, but they don’t provide advice on how suitable these products are for your circumstances.

So, in recent years a new type of online investment management service has sprung up. These are designed to cater to younger, tech-savvy investors who want help to grow their money but cannot afford the fees of traditional IFAs. 

These include companies like Moneyfarm, MoneyBox, Nutmeg and OpenMoney. 

Increasingly, these platforms have also begun to respond to the demand from customers looking to put their money in more socially responsible investments. 

These services are mostly digital, so you access them via websites or smartphone apps. They typically blend investment management services with financial advice.

They mainly do this by asking investors questions about their appetite for financial risk alongside their sustainable investing goals and tailoring a range of funds managed by in-house investment teams.