All investors want to make the best decisions for their money, and when it comes to acting morally with their investment choices, this can also be a similar case. However, there can be a very fine line between what is considered morally right and morally wrong.

ESG stands for Environmental, Social and Governance and typically refers to non-financial factors which investors can use as a framework for sustainable investment choices.

They’re not commonly mandatory in financial reporting, however, companies are increasingly beginning to disclose theirs in their annual reports or are producing stand-alone sustainability documents.

ESG Investing can also help investors with their financial analysis process to identify material risks and growth opportunities too.

ESG Factors

ESG can be broken into three categories – Environmental, Social and Governance. However, you’ll find that it can be hard to distinguish just one category in which the factors fall into as many of them are entwined together and cannot be classified into just one.

Environmental factors typically refer to caring for the planet. This can include but is not limited to:

– Climate Change
– Decarbonisation
– Biodiversity
– Waste Management

Social factors often refer to a consideration of people and can include things such as:

– Gender and Diversity
– Human Rights
– Labour Standards
– Data Protection and Privacy

Governance factors are often referring to a company’s running standards. Examples of this include:

– Political Contribution
– Lobbying
– Bribery and Corruption
– Board Composition

ESG Criticisms

While ESG Investing can be a great way to make morally-guided investment choices, it has also been met with a lot of criticism, especially due to the extent at which things play into ESG factors and that some objectives can be contradictory.

Some people also perceive ESG Investing as an easy marketing tool for Asset Managers to sell funds to customers with the promise of not having any involvement with corrupt investments.

Environmental objectives of a company are often very clear, with the main one being to head towards being carbon neutral. This in itself is a great long-term financial reason to switch your investments to renewables, but what about the in-between process, costs involved and stranded assets that could be left over?

For example, the UK (as well as globally), is currently facing soaring fuel and energy prices, a lot of which is down to pandemic-induced shortages, as well as the ongoing war in Ukraine. However, some experts are also pointing the finger towards ESG factors being reasons for these price increases as people turn towards more ethical-based investments.

Social factors are a bit vaguer and the balance between choosing to invest or not in some cases can be hard.

An example would be whether it’s right or wrong to invest in a company that outsources its production to a country where workers are paid only a fraction of the UK minimum wage per month. On one side, you have the issue of supporting bad labour choices and conditions, but on the other, you’re supporting a country’s workforce where deprivation and poverty is high. Which one is better?

Governance can also be good because it discourages immoral activity such as bribery, lobbying and workplace sexual misconduct. However, again, some people argue that it takes away from the independence of directors and matters of lesser significance.

There is also no guarantee that you won’t wrongfully invest in a company that you or an asset manager believed to have ranked highly on the ESG scale.

It is worth noting though that it’s not all negative, as evidence suggests that companies who comply with ESG practices, especially in the social and governance sectors, typically perform better and are praised for their representation of women and minorities within business.

Points to take away

Environmental, Social and Governance Investing can be a fantastic way to become confident that your money will be used for a positive impact, whether it be environmentally, socially or through governance.

However, some evidence does suggest that while high ESG investments are more likely to thrive and have long-term performance success, it can be hard to distinguish at times what investments may be more ‘ethical’ on the surface; and, the balance between making moral decisions and making a return on your investments may be difficult to choose between.

Like with all investing, it is important that you carefully consider all your options when it comes to ESG investing, and make decisions that will be best for you. It is always encouraged that you seek the advice of an independent financial adviser too who will help in your decision-making.

Independent Financial Advisers give you a whole of market approach and remain unbiased towards specific investment types and strategies.

Coffey Brooks are a team of Independent Financial and Mortgage Advisers based in Clacton-On-Sea, Essex and are directly authorised and regulated by the Financial Conduct Authority.

Investing always involves an element of risk and you are never guaranteed a full return on the money that you put in.