Do the Right Thing is a 1989 Spike Lee movie where the protagonist wants to do the right thing but often finds it hard. Similar to responsible investing, it can often be hard to know where and how to start.
First of all, there are different types of responsible investing. We can distinguish between socially responsible investing and Environmental, Social & Governance (ESG) investing. Once a niche practice, ESG investing has become a large and fast-growing market segment, however, although interest in ESG investing continues to grow, the fear of missing out on returns still inhibits many investors.
In such a new and broad investment landscape, it takes time to investigate and understand how ESG works. There are also several myths around ESG investing, which we’ve dispelled below.
1. Myth: “ESG investors must sacrifice high returns for investments that match their values”
According to PwC Luxembourg’s first European Sustainable Finance Series report, ESG investing is the growth opportunity of the century! Specifically, it gives evidence that the pandemic’s impact was not felt as strongly in the ESG space compared to the overall market.
A report from Morningstar confirms PwC’s stance. The performance of their own ESG-screened indexes tends to be strong, with 57 of 65 ESG indexes (88%) outperforming their broad market non-ESG equivalents for the five years through to the end of 2020.
Finally, researchers continue to explore the relationships between ESG performance and corporate financial performance and, in fact, companies that consider ESG are more likely to be strategic in nature - being less focused on beating next quarter’s earnings and more engaged on creating an enduring company structure and long-term financial results.
2. Myth: “ESG investing is simply not investing in something”
It’s true that negative screening has been the most widely applied sustainable investment strategy globally, used for two-thirds of sustainable investments. Negative exclusionary screening in ESG is the process of identifying and excluding certain sectors and/or companies from the investment portfolio based on controversial business activities or practices.
However, a big part of sustainable investing is engaging with companies, not just divesting. Divesting is the removal of investment capital for moral and financial reasons. For example, at PensionBee we believe in the engagement with consequences approach. This means we want to work with all companies to help them become better corporate citizens and create an investment system that rewards positive impact to the planet and society. However, there will always be some companies that it’s not possible to engage with. This is as a result of their business activities, such as the manufacture of weapons expressly intended to harm civilians, or because they continually break international norms in line with the United Nations Global Compact (UNGC).
Nevertheless, ESG integration, which is the systematic and explicit practice of incorporating ESG factors and information into financial analysis and investment decisions, has been growing at 17% per year. This technique is now used with nearly half of sustainable investments.
3. Myth: “ESG investing only impacts the environment”
The environment is definitely a crucial part of ESG investing, however, the “S” (social) and the “G” (governance) components are also fundamental. A number of social and governance factors can affect a company’s financial performance, ranging from short to long-term challenges.
Social factors to consider in sustainable investing, include looking at a company’s strengths and weaknesses in dealing with social trends, its workforce, the communities it operates in, and politics. The governance factors include decision-making, the purpose of the corporation, business ethics, tax transparency, role and responsibilities within the company, including the board of directors, committees, managers, shareholders and stakeholders.
Several companies and European funds are exploring ways to improve how they consider risks and opportunities related to social and governance factors, for instance linking their sustainable investing strategies to the United Nations Sustainable Development Goals (SGDs) - 17 goals developed to “end poverty, protect the planet, and ensure prosperity for all”.
Another example is the Workforce Disclosure Initiative (WDI) which aims to “improve corporate transparency and accountability on workforce issues, provide companies and investors with comprehensive and comparable data and help increase the provision of good jobs worldwide”. In 2021, 173 global companies took part in the initiative, including PensionBee.
4. Myth: “Only young people are choosing ESG investing”
Sustainable investing strategies seem to have particular appeal among younger generations, however, different studies from different institutions show that baby boomers and generation X investors are equally interested in ESG investing and many consider sustainability factors when selecting an investment product to ensure they make a positive impact with their investments.
Furthermore, the UK’s Department for International Development found that “68% of UK savers wanted their investments to consider the impact on people and planet alongside financial performance”. This shows that investors across all age groups do care about more than just the financial gain of their investment portfolio, they want to understand the social impact of their investment too.
5. Myth: “ESG investing is expensive”
One concern that frequently arises amongst those new to ESG investing is price. Overall, affordable sustainable investing options are becoming more available to savers and retail investors as exchange-traded funds or EFTs. EFTs are financial products usually structured to mirror a specific segment of the market, often indices and are increasingly incorporating sustainability.
Morningstar have examined several different funds comparing their average expense ratio and found that the average expense ratio for ESG funds tends to be lower than the average for non-ESG funds. With regards to fees, these are just slightly above the average for ESG funds in comparison to non-ESG funds.
Whilst ESG funds tend to be a bit more expensive compared to other funds, the differences are minimal and can often be attributed to the fact that ESG funds are not very large and most of them are usually actively managed.
PensionBee offers its customers the Fossil Fuel Free Plan: one of the UK’s first mainstream private pensions to completely exclude companies with proven or probable reserves in oil, gas or coal, tobacco companies, manufacturers of controversial weapons and persistent violators of the UN Global Compact, whilst also investing more of savers’ money in companies that are aligned with the Paris Agreement.
Our continued focus on investment solutions designed for our customers’ needs has led us to search for an index-based impact plan and we’re working hard behind the scenes to offer our customers the best option possible.
View our pension plans to learn more about the Fossil Fuel Free Plan and the other plans we offer.
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.