The trend that's taking professional investors by storm

The UK was just one of many countries to record all-time high temperatures this year. Studies show that such heatwaves are now 30 times more likely because of climate change. And the temperature's not just rising in the summer. Temperatures of 21.2 degrees Celsius were recorded in London's Kew Gardens in February 2019 – the hottest winter day on record.

That's not all. We're burning through the Earth's resources faster than ever. Earth Overshoot Day is a symbolic date on which our consumption for the year outstrips Earth's capacity to regenerate those resources in that year. In 1999, it was 29 September. In 2019 it was 29 July.

Business leaders, politicians and the public are beginning to realise the way we live our lives isn’t sustainable and calls to take action are getting louder.

Professional investment managers are taking note too. They increasingly want to understand what impact the companies they invest in have on the environment and society, and how well they're managed.

More than a quarter of money managed around the world is now invested with environmental, social and governance (ESG) factors in mind. That includes some of the world’s biggest investment funds such as Japan’s Government Pension Investment Fund (GPIF) and the Dutch pension fund (ABP).

Why is ESG so popular?

Awareness campaigns like David Attenborough's Blue Planet II documentary series have thrust climate issues into public consciousness. We're more aware than ever about the impact our actions have on the planet.

But you don’t have to be an environmentalist to consider ESG factors when you invest. Issues related to the way a company is managed, or its effect on the environment and society can cause reputational damage, impact profits and drag down a company’s share price.

This matters today more than ever. In a world dominated by social media, a company's misdeeds appear on the news feeds of millions of potential customers and investors in a matter of hours, potentially sparking outrage, backlash and boycott.

Facebook itself ended up in hot water when the Cambridge Analytica scandal revealed the social media giant failed to protect the personal data of more than 87 million users. It highlighted a number of shortcomings in the way the company's run and led to some intense scrutiny. The company's share price fell sharply in response.

Is ESG a fad?

We don’t think so. The government recently introduced plans to cut greenhouse gas emissions to 'net zero' by 2050. That means emissions will have to be avoided completely or – if that's impossible – offset by planting trees or sucking CO2 out of the atmosphere. Legislation is already being discussed that will force pension fund trustees to show how they're addressing the risks posed by climate change, and more is expected in the near future.

ESG has a demographic tailwind too. Millennials (those born between 1981 and 1996) are more interested in sustainability than any generation before them. They're on track to become the largest living adult generation in 2019, and wield enormous buying power. As their wealth increases over time, they have the potential to reward sustainable companies while severely punishing those that fall short of what's expected.

Tell me more

Good Money Week could be a great time to check if the companies and funds you invest in take ESG issues seriously. If you want to learn more about ESG, 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 as well as rise in value so you could get back less than you invest. This article is not personal advice, if you’re unsure of the suitability of an investment for your circumstances, please seek advice.