Ethical and ESG investing. What’s the difference?

Today, a growing number of investors are looking for investment choices that will help their assets grow, whilst also making a positive difference in the world. Therefore, investment types such as ESG and ethical investing are becoming more popular. However, people often think these two investment types are the same, and although there are some similarities, there are some differences that people should consider too. Below we are looking at what these differences are.

Ethical investing  

Aligning your investments with your values

Ethical investing is about selecting investments based on ethical or moral principles. This usually means avoiding investing in certain types of companies and sectors such as tobacco producers, weapon manufacturers or companies involved in animal testing. It gives investors the chance to avoid investing their money into companies whose practices and values do not align with their own personal beliefs. This exclusionary form of investing has a comparatively long history and is straightforward to put in place. There is no engagement with the excluded companies to exert influence to change.

Environment, Social and Governance (ESG) investing

Analysing risk by looking beyond just the financial data

ESG investing is a newer strategy brought out of the initial desire of institutional investors to look beyond exclusionary investing to critical long-term trends. It focuses on three main criteria, these are environmental, social and governance factors.

  • Environmental factors take into consideration the impact companies are having upon the planet today and in the future. For example, the urgency of the climate change emergency and the need to transition from fossil fuels to green energy.
  • Social factors look at the impact companies have on society and communities, for example human rights.
  • Governance focuses on the how a company is run including its leadership, finances and equality and diversity.

A fund manager will assess a company based on the ESG framework, with the belief that these factors are critical to a company’s future financial performance. This could be in the form of reducing risk or enhancing long-term returns.

It’s important to note that an ESG approach won’t necessarily exclude (or divest from) companies based on your values or your ethics. An important aspect of the approach is to engage and attempt to influence the underlying companies to improve their ESG outcomes.

Instead of ‘excluding’ whole industries from your investable universe, you identify the companies that performed best among their industry peers in terms of E, S and G factors.

Fund managers also analyse non-financial factors for ESG investing. Whilst important these factors are not as straightforward to measure, requiring more qualitative and subjective judgement. This is then combined with hard quantitative financial data of earnings, profit and loss.

How are they different?

Whilst both investment types consider societal outcomes, there are differences between the two. ESG investing means investing money as sustainably as possible for the future, rather than being overly influenced by the short term. It looks at environmental and social sustainability and makes sure companies have governance in place to improve that sustainability and provide incremental improvements year on year. [1] It is used as a guide to help the investment selection.

Whilst ethical investing is also driven by values, this investment type is ultimately defined by the investor. The values can be accepted widely or more specific to the client. It’s their choice as to what industries they wish to support and how they want their money used[2] based on their principles.

For example, those who choose to use ESG factors when investing their money, may be investing in the oil industry as it scores well on the ESG criteria because of their investment, research and development into clean and renewable energy. However, in ethical investing this entire industry is likely to be avoided, despite any good work they may be doing.

Sustainable Dynamic Portfolios

At Foster Denovo, we have a range of Sustainable Dynamic Portfolios designed to address the growing needs of investors.

The Sustainable Dynamic Portfolios are investment portfolios that have been carefully designed to balance investment risks with returns to help achieve financial goals, taking into account the investor’s attitude to risk, time frame, capacity for loss and crucially ESG criteria. This, in turn, offers you, as the investor, the peace of mind that their capital is being invested in companies that have a positive future and a long-term outlook.

If you have any questions or would like to learn more about the Sustainable Dynamic Portfolios, please speak to your Foster Denovo Partner. Or if you are new to Foster Denovo:

call 0330 332 7866; or

email advise-me@fosterdenovo.com.

Please note:

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.

The FD Sustainable Dynamic Portfolios are managed by FD Dynamic Portfolios Limited (FDDPL), which is an appointed representative of Foster Denovo Limited (FRN 462728), which is authorised and regulated by the Financial Conduct Authority (FCA). FDDPL has issued this document in its capacity as investment adviser to the investment manager, AB Investment Solutions Limited (FRN 705062), which is authorised and regulated by the Financial Conduct Authority (FCA).

[1] ESG and ethical investing – Aviva
[2] Ethical Investing Guide: Everything you need to know about ESG and SRI | Wealthify.com