An expert's view on ESG

We all have our own reasons for investing. Some want to buy their first home. Others want to use their hard-earned life savings to pay an income in retirement.

Whatever you invest for, futureproofing your portfolio is probably among your top priorities.

Environmental, social and governance (ESG) funds are a relatively new way to invest, and they've become hugely popular. Fund managers who invest with ESG principles in mind think about how a company's managed, and the risks it poses to the environment and society.

Well-managed companies that are aware of the environmental and social risks they face could be less likely to face regulatory issues or reputational damage in the future.

In June we caught up with Therese Niklasson, Investec's Global Head of ESG, to find out more.

Q. Why should ESG matter to investors?

Certain activities come with additional risk and potential cost that's important for investors to be aware of.

Think about the mining industry. A mining company might be less likely to face bad press if they have robust environmental and safety policies in place. And it’ll be less likely to face industrial action if it treats its workers fairly.

ESG analysis aims to highlight these risks so they can be properly considered before an investment is made.

Q. There's a perception that ESG can harm investment returns. What do you say to that?

This comes from a misunderstanding of what ESG is. It traces its roots back to ethical investing, which can have an impact, either positive or negative, on returns because it excludes certain industries that some find unethical, such as tobacco or alcohol producers.

Many ESG funds have the freedom to invest in companies from any industry. But their fund managers fully consider the environmental, social and governance risks faced by a business. It actually has the potential to improve returns because it reduces the risk of something unexpected impacting a company they've invested in.

From an environmental perspective, we're hitting a tipping point like we've never seen before. We've moved into a different epoch – a point where for the first time in history, humans are the main influencers of the natural system. The implications of our actions could become expensive from here on in. I think it's more important than ever to consider this, as well as a company's impact on society, when making investment decisions.

Q. Engagement is a big part of responsible investing. Can you touch on how you engage with companies?

When we feel company managers could be doing more to increase earnings or improve transparency, governance or the impact the company has on society, we engage with them to try and find a solution.

Gold producer Sibanye Stillwater is an example. We didn’t think the company was doing enough to address safety issues. Lax safety standards can lead to a damaged reputation and costly legal cases if something goes wrong. We spoke with the Chairman of the Board and CEO and eventually the company made a firm commitment to address safety concerns. They even introduced a scheme that linked progress on safety issues to employee pay and reward.

Our engagement tends to be more successful when we work with other parties to bring about change. For example, we recently teamed up with the Church of England to persuade Glencore, the mining company, to commit to not growing its coal production capacity.

Q. What's the future for ESG?

In recent years we've seen the carbon and climate change movement gain huge traction and these will continue to be powerful themes. Regulation around ESG has changed tremendously and I expect that to continue too. The world's largest pension funds are now starting to take ESG seriously and their trustees increasingly have to show they're addressing the risks posed by climate change.

These are positive steps forward and I think they'll come through to the asset management industry sooner than most people think. Funds will increasingly have to demonstrate that they're taking ESG issues seriously in their financial documents.

In 2020 the United Nations 26th Conference of Parties will meet to discuss the progress made since the Paris Accord was signed in 2015. They'll also look at what more we must do to limit the effects of climate change. This could also have implications for the asset management industry.

It's a blizzard of ESG activity out there now and I don’t expect it to slow down anytime soon.

Want to learn more?

If you want to learn more about how to align your investment portfolio with your views, our guide to responsible investing is a great place to start.

You might also want to read our ethical sector review, where we look at a selection of funds taking a number of different approaches to investing with morals in mind.

All investments fall and rise in value, so you could get back less than you invest. This article is not advice and if you’re unsure of the suitability of an investment for your circumstances, please seek advice.