Social media and the internet have made it so news about issues such as climate change, human rights violations and government corruption reach us in record time. And yet, despite being hyper-aware of these challenges, we often feel powerless to actually do anything about them. Faith in our government to enact the change we’d like to see has been in steady decline and recent global events such as Brexit have not helped this situation. In fact,over two thirds of the UK public feel as though they are not represented by major political parties and around a third did not even bother to vote in the recent 2019 General election.
Lack of faith in governments’ability to tackle global issues has been a contributing factor to the formation of various politically charged groups, such as the controversial protest groupExtinction Rebellion.But perhaps a better way to make our voice heard to world leaders is not through gluing ourselves to trains, but in where we choose to put our money. Our decisions on where and how we choose to spend our money can have a massive impact. There is already a rising trend in ethical shopping, which is, buying products that have been produced in an ethical and/or environmentally friendly way. The effects of this can be seen as many UK online fashion retailers such as ASOS have started adding optional filters to only view clothing which has been produced sustainably. But as well as the way we spend our money, we can make a similar impact from the way we choose to invest it. One option for responsible investing as a way of encouraging positive change is to invest in those companies which comply with ESG.
What is ESG?
ESG is effectively a framework for measuring the sustainability and impact of investments. The term was originally coined in 2005 and is an acronym for the areas taken into consideration when deciding how sustainable an investment is; Environmental, Social and Governance. But it can be difficult as an investor to figure out which investments qualify as ESG. As if choosing the right investments was not already a difficult task, doing so within the confines of a framework which retail investors may not even fully understandcan seem impossible. Fortunately, help is at hand in the form of ESG Funds.
ESG Funds can make investing responsibly relatively easy. They function in exactly the same way as other funds in that they are collective investments where you and other investors effectively pool your money together and a fund manager then uses that money to buy and sell investments that adhere to the theme and aims of the fund in order to make the greatest returns. The only difference is that underlying investments will comply with ESG principles. These funds can either be more general or narrowed down into different, more specific, themes such as climate change, equality and diversity or a host of others to help you make the most impact on the issues you are most passionate about.
Reasons to go ESG
The reason ESG has such potential to create social change is because companies need investors. If more investors take the decision to only invest in those companies who are committed to running their business in both ethically and environmentally friendly ways then this forces companies to step up or risk losing their investors and their capital.
But if making the world a better place was not motivation enough to get into ethical investing, it may also be the best decision financially. There has been a steadily increasing critical eye cast on those companies who are found to be taking part in shady activities, and those companies who are caught out can see their share price change dramatically of the back of any scandals. IBM saw their share price drop over 10% in August this yearafter it came out that there had been a lawsuit filed against them at the end of July following suspected discrimination against older employees. Even more dramatically, back in 2010, BP plc saw their share price drop by around 40% after being responsible for one of the worst oil spills in history. The potential for companies to get caught up in one of these controversies and have their share price take a hit poses a serious risk for investors.
Meanwhile exciting new industries such as sustainable energy are providing potential opportunities’ for investors. Companies such as Ormat Technologies, a provider of alternative and renewable energy technologies, have seen their share price increase by approximately 180% in the last 5 years.
Final Thoughts
In summary, whilst we would all like to be able to do more about the challenges facing the world today it can be difficult to figure out how we can help with issues such as climate change, discrimination and corporate corruption. However ethical investing provides a great way to do this, and using ESG focused funds makes this relatively easy.
By using ESG as a framework for how we choose to invest our money it allows us as individuals to hold corporations responsible for their actions and ensures they have incentive to behave ethically. Investing in ESG investments is also potentially the wisest move financially, in order to reduce risk from companies being caught in controversies and cash in on those companies paving the way for global initiatives such as reducing our use of fossil fuels through the use of new technologies.
