If you’ve been researching ethical investment opportunities, chances are that you’ve stumbled across the three letter abbreviation “ESG”, standing for Environmental, Social and Governance, a general term that refers to investment in businesses and funds that are ethical. For many people, investing in businesses like these gives you a feelgood factor which simply isn’t there when you’re investing in industries like the oil, gas or automotive industries.
Let’s break it down…
Environmental: are products created sustainably? Does the company offset greenhouse gas emissions? Is recycling a major and transparent part of their business model?
Social: is there visible contact with the community the company serves? Is there clear evidence of rigorous equality and diversity standards?
Governance: is the company’s board diverse? Is the payment structure for board members reasonable? Is there meaningful interaction with shareholders and employees?
So, if sustainability and eco-friendly agendas matter to, you then ethical investment is a way you can get your investments to align with your values.
Unsurprisingly, there has been a spike in the number of funds available that have an ESG remit. Over $1tn in funds are globally tied up in what can be described as ‘ethical investments’ and, in Europe, ESG funds are close to 33% of all sales in the sector. There are now close to 3,000 ethical funds on the market worldwide. That’s a lot of options.
As part of the greenification of finance, the UK Chancellor recently announced details of £15bn of Green Bonds, intended to address carbon issues and climate change.
Of course, what is ethical is subjective. Your opinion many differ from your neighbour’s. But they rest on core values of trying to protect the planet, sustainable solutions and a broad consensus of considered investing where return is not necessarily the core determinant.
Research suggests that ethical investing is delivering returns on a par with non-ethical.
The process of identifying individual stocks and businesses that correspond to your values is time-consuming and requires you to be clear about the values that are dear to you and the transparency with which individual business conduct themselves.
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