2020 has been a crazy year! For many of us, it’s forced us to take a step back, re-evaluate our lives and understand what’s most important to us. I’ve been a vegetarian for about 15 years now, I’m an active recycler and I haven’t been on any flights this year (although I didn’t have much choice over that one!). But I can’t help thinking I could be doing more.
It turns out I can - via my pension. Moving your pension pot to a more sustainable fund can have 27 times more impact in reducing your carbon footprint than giving up flying and becoming vegan combined!
What is ESG?
When researching which companies to invest in, analysing their finances is an obvious place to start. But this doesn’t necessarily tell us how they’re going to perform in the future. To understand this, we need to look beyond their finances: are these companies well-positioned to survive the challenges that the next 5, 10 or 50 years have to throw at them? That’s where ESG comes in.
ESG stands for:
Environmental What impact does the company have on the environment? E.g. Do they manage their carbon emissions? Do they dispose of harmful waste safely?
Social What impact does the company have on society and communities? E.g. Do they adhere to health and safety standards? Do they employ a diverse workforce?
Governance How is the company run? E.g. Have they been involved in any fraudulent activities? Do they compensate executives fairly?
The key idea behind ESG is future-proofing your investments. Remember the VW ‘dieselgate’ scandal? They’re still paying for that...
What is ESG investing?
Investing in companies that pass one or more of the ESG criterion. This doesn’t mean that your portfolio will be made-up entirely of organic supermarkets or wind turbine manufacturers - you could be invested in an oil company that’s developing its renewable energy business, or a chemical company with a great workplace culture.
PensionBee’s Future World Plan is an example of ESG investing. The plan invests in companies that are aligned with its ESG factors and will engage directly with the world’s largest companies to encourage them to reduce their carbon footprint. Those that don’t comply could face exclusion from the plan.
What is ethical investing?
Many people believe that we haven’t gotten anywhere in our attempts to engage with so-called ‘bad’ companies. Instead, they’ve decided to exclude them altogether and focus on supporting companies that are dedicated to reducing their impact on the environment. This is called ethical investing.
PensionBee’s new Fossil Fuel Free Plan is an example of ethical investing. It’s one of the UK’s first mainstream private pensions to completely exclude fossil fuel, tobacco and controversial weapons companies.
Will this impact my returns?
People used to think that by investing in ‘good’ companies, you had to sacrifice returns. You’ll be pleased to hear that this is no longer the case! In fact, evidence suggests that sustainable (i.e. ESG or ethical) funds have actually outperformed traditional funds over the long-term.
Are these types of investments higher risk?
As with all investments, there are risks involved. But these are managed through the construction of a diversified portfolio (i.e. spreading your investments across a wide range of companies and industries so you’re not overly reliant on a single one). What’s more, the companies that qualify to be included within sustainable funds are typically better-positioned to overcome future challenges, such as our transition to a low-carbon economy, which arguably makes them less risky.
How can I invest more sustainably?
With the rise of sustainable investment options, you no longer have to uproot your lifestyle in order to have a positive impact on the planet. By switching your investments to ESG/ethical-friendly options, you can benefit the environment while (potentially) reducing your investment risk and increasing your returns at the same time.
Opinions and views are the author’s own.
Risk warning: As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.