ESG investing

What is ESG?

ESG is an investment approach where you take Environmental, Social and Governance factors into account alongside traditional financial factors when making investment decisions. ESG investors believe these factors play an important part in the long-term performance of a company. It covers a range of different topics that vary in importance depending on the company’s size, location and industry.

Here are the three ESG pillars and some examples of the issues they cover:

The different ESG factors

Environmental factors	Social factors	Governance factors
Climate change	Human rights	Bribery and corruption
Resource depletion	Diversity and inclusion	Remuneration
Waste	Modern slavery	Board diversity and structure
Biodiversity	Employee training	Tax strategy
Pollution	Community engagement	Transparency around governance reporting
Deforestation	Health and safety	Supply chain
Supply chain and use of third parties	Pay and reward

How to evaluate ESG

Most companies disclose some degree of ESG information in their annual report, and many now issue a more detailed document covering these factors in detail. At HL, we think taking ESG factors into account is a sensible way to manage long-term risks and opportunities. With that in mind, we incorporate major ESG risks and opportunities into our research. With over 100 stocks under coverage, our share research is a good place to get a handle on specific companies, including their potential ESG risks.

Data providers like MSCI and Sustainalytics produce free-to-access ESG scores, which rank companies on their performance across these issues. The scores vary between data providers though, because ESG reporting isn’t yet standardised. Despite this, they can be a useful way to compare companies of a similar size in the same industry alongside more traditional metrics. But it isn’t always an apples-to-apples comparison, so without additional background they can be misleading.

What are ESG funds?

If you don’t have the time or expertise to evaluate a company’s ESG credentials, you can let a fund manager do it for you. Most mainstream funds incorporate some degree of ESG integration. But how heavily each manager weighs these risks within their analysis will vary.

There are a wide variety of options to suit a range of preferences. A good place to start your search is our Responsible investment hub – it has everything from how to get started investing responsibly to helpful tips and fund ideas.

This is not personal advice. All investments can fall as well as rise in value, so you could get back less than you invest.

How does ESG relate to Responsible investing?

ESG integration is one of many ways to use your investments to benefit society as well as yourself. It can be used on its own, or together with other Responsible investing approaches.

Other Responsible investing approaches include:

Stewardship

Stewardship is a way of interacting with a company in which you own shares to drive positive change for the benefit of all stakeholders. This can be anything from coaxing a business to improve its disclosure to opposing the way CEOs are paid.

Exclusions

Some investors may decide to avoid specific companies or industries that do harm to society. This can include controversial sectors like weapons manufacturing or tobacco. This is also known as negative screening.

Sustainability-focus investing

Sustainability-focus investors try to make money by investing in companies that are more sustainable than their competitors. Using this approach can also mean looking for companies that are likely to benefit from the growing need for more sustainable goods and services.

Impact investing

Impact investors invest in companies that have a clear positive impact on the environment and society, like renewable energy companies and education providers. Fund managers using this approach will measure and report back on the positive impact that their funds help to achieve.