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Investing for a better future

Let’s start with the terminology. Environmental, Social and Governance (‘ESG’) investing is an umbrella term for investments that seek positive returns and long-term impact on society, the environment and the performance of the business.

Why talk about it now? Whilst most share prices took a beating at the beginning of the Covid-19 pandemic, ESG investments did better than most. Between climate change activism, Black Lives Matter and other attempts to eradicate social injustices, there is a real appetite in economies, societies and markets for sustainable investments that fight for the future of the planet or support social agendas. This way of investing is most commonly expected of millennials; but the message is spreading and investors from all generations want to learn more.

This is often called Impact investing, giving investors the opportunity to promote a sustainable future without compromising the potential to generate returns.

The good news: ESG is here to stay

According to a recent Morningstar report, 66% of investors said that in response to the pandemic they would add an ESG component to their investment portfolios. Pre-pandemic, companies with good ESG ratings attracted a lot of investor interest pushing up stock prices.

There are now funds of ESG stocks to make them more accessible to investors in health, clean energy, water, waste and food. Ethical investment, always good intrinsically, has become financially sound as a good way to stay on trend and future-proof investment portfolios.

Many ESG investment decisions are based around the United Nations Sustainable Development Goals (SDGs), or Global Goals. These are a collection of 17 interlinked goals designed to be a “blueprint to achieve a better and more sustainable future for all”. The SDGs were set in 2015 by the United Nations General Assembly and are intended to be achieved by the year 2030.

The bad news: corporate green-washing

Some asset managers touting their ESG credentials have had the term ‘corporate green-washing’ thrown at them. The issue is that ESG credentials can be defined differently, and metrics used in sometimes deliberately confusing ways. Some of the biggest ESG funds include companies like Microsoft, Johnson & Johnson, Google, Tesla and Proctor & Gamble, but how ethical and sustainable are those businesses really?

A lot of companies that claim to be carbon neutral have done very little to change. Instead they have opted to purchase ‘carbon credits’: investing in renewable energy or sustainable projects elsewhere in the world claiming it offsets any environmental damage they may have done. However, there are lot of very low quality credits out there that don’t represent any real reductions.

To use a simple example, this system allows a UK airline to offset its emissions by buying credits to build a wind farm in Thailand. However, the wind farm would have been built anyway without the airline purchasing credits. So what real value is there? A recent report from the European Commission argues that only 2% of global projects funded by carbon credits are truly contributing to reducing emissions.

The ultimate corporate giant Google relies heavily on their offsets and claims to have been “carbon neutral” for the last 12 years. Read the small print though: that only takes into account the facilities Google owns, and not the factories that make its products and ship them.

At first glance, Tesla looks fairly ESG-compatible having been hailed as a clean energy revolutionary. It is one of the top US car manufacturers for its ESG credentials. However, amid speculation that e-cars may be less ‘green’ than we thought, the FTSE 100 rates Tesla poorly based on the lack of disclosure about the environmental impact of its manufacturing.

Climate change activists take on the task of scrutinising whether companies take real action to back up their grandiose statements. Following years of chief executives from the world’s leading companies making pledges at Davos, in early 2020 Greenpeace published a report that named and shamed top financial players who pumped US$1.4 trillion into fossil fuels.

Covid-19 and the pandemic aside, the reason for this panic may be partly to do with consumer and activist pressure – but businesses have a more immediate problem. Investors across all generations have become an unexpected driver of change as they want to build back better and invest sustainably.

Read more from this edition of Ahead of the Curve

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