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 customers a choice of either the Impact Plan or Fossil Fuel Free Plan, which both select investments using environmental, social and governance criteria.

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.

How do ESG and impact investing differ?

ESG and impact investing are both types of sustainable investments that aim to generate a long-term financial return, however, there are some key differences between the two.

ESG investing involves investing in companies which consider how they run their business in regard to a framework of environmental, social and governance factors. In doing so, a company may be able to reduce its long-term sustainability risks. These ESG factors are reflected in a company’s policies such as its climate policy or health and safety conditions in its workplace. For example, a company without proper data security practices in place may be exposed to data breaches which could threaten its share price.

ESG investments are screened for various environmental, social and governance policies. It’s essentially a set of criteria meant to identify and exclude investments that have material ESG-related risks.

Impact investing, on the other hand, invests in businesses actively addressing a social or environmental need in order to produce a tangible and measurable change such as reducing CO2 emissions or providing more affordable housing.

The premise of impact investing is that investors don’t have to choose between investments that address environmental or social issues, or investments that generate strong financial returns – they can have both.

Watch our Impact Plan’s Co-Portfolio Manager, Eric Rice, explain more about impact investing.

ESG pensions

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

  • Impact Plan: Companies in the Impact Plan are working to support underserved communities and tackle challenges that are going unaddressed to help improve lives and create a better planet for us all to live in. The Impact Plan invests in companies helping to provide education and affordable housing or develop green energy and sustainable food and water to name but a few examples. And crucially those companies’ impact on people and the planet can be measured so you know they’re contributing to real change.

  • Fossil Fuel Free Plan: Excludes the fossil fuel and tobacco sectors while only investing your money in companies aligned with the Paris Agreement goals.

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.

View our pension plans page to learn more about the Impact Plan, Fossil Fuel Free Plan and the other plans we offer.

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.

Last edited: 06-04-2024

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