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.
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; and
- producing recyclable products.
Social factors
- Health and safety;
- labour standards;
- human rights record;
- product safety;
- privacy and data security;
- product or service accessibility; and
- local community engagement.
Governance factors
- Board diversity;
- accounting practices;
- executive compensation;
- business ethics;
- tax transparency;
- corruption;
- shareholder inclusion; and
- 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.
ESG pension
PensionBee offers customers a pension plan that selects investments using ESG criteria.
- Climate Plan: The plan invests in more than 800 publicly listed companies globally that are actively reducing their carbon emissions and leading the transition to a low-carbon economy.
View our pension plans page to learn more about the Climate 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: 05-12-2024
