An Investment Sector Bucking The Trend?
In a difficult year for investors one sector has managed to buck the trend. ESG or Environmental, Social and Governance investment has not only been able to grow the amount of capital being directed towards it, but also expand its visibility with the industry and public at large.
We are unlikely to understand the full impact of the Covid-19 crisis on the global economy for many years - but what is clear is that the pandemic has brought social, ethical and environmental factors into sharper focus.
Our clients and the investment firms we partner with are asking deeper questions about the businesses they engage with and how they operate, and where their money is going. Alongside this governments are being lobbied to ensure any recovery is a sustainable or green one and this is pushing these factors onto the front page.
Over the last 20 years the ESG investment world has grown from a few ethical or ‘green’ investments to a wide selection of different strategies and an industry in itself investing millions.
The principle began with “negative screening” funds. These were introduced to help people who wanted to avoid investing in specific sectors for ethical reasons, such as armaments, tobacco, alcohol and gambling. Next came the idea of “positive screening”, with the development of funds focused on companies with the potential to provide positive benefits to society. In the energy sector, this could involve investing in companies generating power from clean sources such as solar and wind rather than from fossil fuels, for example.
More recently many forward thinking fund managers have taken on board how important sustainability is to the long term prospects of companies. This has led to the development of funds that consider environmental, social and governance (ESG) factors as an integral part of their investment selection process.
Environmental factors include resource and energy use, pollution and climate change; social factors relate to social trends such as demographic changes and societal attitudes; and governance factors relate to the quality and robustness of a company’s internal structure and practices. “Impact investing” funds are another more recent development. These focus on investing in companies that aim to deliver specific positive changes for society or the environment, for example by helping to reduce poverty or clean up the oceans.
In the past with such a limited choice of funds and approaches and more concentrated portfolios it was suggested that these kind of strategies did not perform, but this is no longer the case and now you are able to build a diverse risk controlled portfolio that should be able to deliver throughout the market cycle.
In recent times, as populations have changed the way they work old style industries such as fossil fuel providers have tended to underperform whilst more technologically led forward thinking industries have out-performed and this have helped performance short term.
However as the sector grows the likelihood of contradiction also grows and one man’s green is another persons black, but there is no doubt the process and sector is here to stay.
Speak to your Octagon adviser about how you can incorporate some of these principals into your portfolio.
This article does not constitute advice. Anyone considering any form of financial planning should seek independent financial advice. Octagon Consultancy Limited is authorised and regulated by the Financial Conduct Authority (FCA). You should note that the FCA does not regulate tax advice. Past performance is not indicative of future results. The value of your investment may go down as well as up