What is Environmental, Social & Governance (ESG) investing?

ESG (Environmental, Social and Governance) investing is an investment approach that considers how companies impact the environment and society, as well as how they’re governed. A company that disposes of its waste in an environmentally damaging way would be unlikely to meet ESG criteria, for example.

A small minority of UK investments are held in ESG funds, but the sector is growing. And as ESG investment funds increase in popularity, so are pensions. PensionBee offers two pension plans that select investments using environmental, social and governance criteria: the Fossil Fuel Free Plan and the Future World Plan.

What is ESG?

ESG stands for Environmental, Social and Governance. It’s most commonly used to define a type of investment approach that focuses on companies that meet particular environmental, social and governance criteria.

Environmental factors

  • Carbon emissions
  • Water usage
  • Land conservation
  • Waste disposal
  • Animal welfare
  • Producing recyclable products

Social factors

  • Health and safety
  • Labour standards
  • Human rights record
  • Product safety
  • Privacy and data security
  • Product or service accessibility
  • Local community engagement

Governance factors

  • Board diversity
  • Accounting practices
  • Executive compensation
  • Business ethics
  • Tax transparency
  • Corruption
  • Shareholder inclusion
  • Political affiliations

In some cases, entire industries may be excluded due to the type of product or service companies operating within that sector provide. Tobacco and gambling companies are two examples.

Types of ESG investment funds

As demand for ESG investing grows, more ESG investment and pension funds are launching in the UK each year. And while they all share the ambition of achieving financial returns while investing in companies that meet their ESG criteria, their approaches differ.

In the US, the Investment Company Institute published a report attempting to define the various terms and techniques of ESG investors. The three key investment approaches are defined as:

  • ESG exclusionary: a values-based approach that excludes companies operating in sectors such as fossil fuels and tobacco.
  • ESG inclusionary: a score-based approach that assesses individual companies based on their ESG performance.
  • Impact investing: a theme-based approach that includes companies that work to progress the development of ESG-aligned causes, such as clean energy.

ESG pensions

PensionBee offers two pension plans that select investments using ESG criteria.

  • Fossil Fuel Free Plan: Excludes the fossil fuel and tobacco sectors while only investing your money in companies aligned with the Paris Agreement goals.
  • Future World Plan: Invests your money into companies that pledge to move to an environmentally-friendly economy.

The Fossil Fuel Free plan excludes companies that don’t comply with the United Nations Global Compact screening criteria, which include a range of ESG criteria such as environmental and anti-corruption policies.

The Future World Plan seeks to propel positive change on ESG issues, at the same time as seeking to achieve financial success. The plan manager, Legal & General, achieves this by using its scale and influence within the market to force change.

View PensionBee’s plans page to learn more about the Fossil Fuel Free Plan and Future World Plan.

Risk warning

As always with investments, with a pension 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.

Last edited: 11-03-2021

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