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Foster Denovo|News & blogs|Opinion|3 valuable reasons to consider ESG investing this Earth Day

3 valuable reasons to consider ESG investing this Earth Day

Each year since 1970 on 22nd April, Earth Day is held. It marks and celebrates the founding of the environmentalist movement, which has helped to preserve the natural world and spread awareness of the issues facing our planet.

This is a cause close to many people’s hearts as, according to figures from the Office for National Statistics, three-quarters of Brits surveyed in October 2021 were worried about climate change. So, you might be wondering how you can do your bit.

The phenomenon of “ESG investing”, which focuses on making ethical and sustainable investments, has risen to prominence in recent years. Before we look at that, let’s take a quick look at what this investing strategy involves.

ESG is a set of standards used to measure a business’s impact

Essentially, “ESG” is a set of criteria used to establish the impact of a business on the wider world. The environmental aspect of this strategy tends to get the most attention, but it isn’t just about protecting the planet. ESG stands for:

  • Environmental – This looks at how a company’s operations affect the environment. For example, this may include the carbon footprint of a business, or how responsibly they manage their waste.
  • Social – This examines a company’s relationship with the communities they work with and their employees and wider stakeholders. This may consider issues like customer satisfaction, working conditions, and human rights.
  • Governance – This considers the management of a company and the standards to which it is run. For example, this might involve issues such as the fair election of board members or the pay and bonus structure of directors and executives.

While ESG and sustainable investing were once niche strategies, they have grown significantly in both visibility and popularity in recent years. Here are three valuable reasons why you should consider it.

It can make your portfolio more resilient to longer term shocks 

One of the main benefits of ESG investing is that its focus on long-term sustainability makes it more resilient to financial shocks. You can see this in how these funds fared during the pandemic.

For many investors, the outbreak of the coronavirus, and the subsequent lockdown that followed, was the first real test of how ESG funds performed in the real world under a medial and economic shock unseen in a century.

To the surprise of some, many of these saw strong growth. According to data from FTAdviser, 94% of sustainable indices outperformed their non-sustainable counterparts in the first quarter of 2020.

One of the main reasons for this is that ESG funds can be diversified options when compared with more conventional funds, which can make them less susceptible to financial volatility. For example, the lack of exposure in areas such as fossil fuels (oil and gas) and airlines meant that they were not as badly affected by the economic fallout of the initial lockdown. Equally, investing in different sectors and avoiding the aforementioned sectors can be detrimental to short-term performance, as seen from the initial fallout from Russia’s invasion of Ukraine and the energy price shock that followed. Looking through a longer term lens, governments are realising the importance of energy independent and using green and renewable energy to replace the need to import foreign oil and gas.

It can reflect your morals and personal beliefs

Another benefit of investing according to ESG principles, is that it can help you align your portfolio with your morals and deeply held personal beliefs. For example, if you’re passionate about stopping climate change, it can give you more peace of mind to know that you’re not contributing to any environmental pollution.

You might also be surprised to learn the real impact that ESG investing can have. According to a study published in Pensions Age, switching your pension to a more sustainable fund can help you to significantly reduce your carbon footprint.

According to this analysis, if you have a pension pot of £100,000 and invest it in an ESG fund, you could save as much as 64 tonnes of carbon, compared to a non-sustainable investment. This makes ESG investing approximately:

  • 57 times more effective than switching to a vegan diet;
  • 20 times more effective than trading your petrol or diesel car for an electric one; and
  • 40 times more effective than switching to a renewable energy provider.
It can outperform other stocks

The third reason to consider investing according to ESG principles, is that you may see greater returns over the longer term. This can mean that not only will your money be more resistant to longer term market volatility and reflect your morals and personal beliefs, but it could also grow more effectively.

According to a study published by FTAdviser, European portfolios that were invested to a high degree of ESG principles persistently outperformed their benchmark. This is the case even after factor and sector adjustment.

The report notes that that the European high-ESG (top 10% of MSCI scored companies) equity portfolio consistently outperformed by around 12% a year. This shows that you don’t have to necessarily choose between investing in a sustainable way or seeing strong risk adjusted returns on your portfolio. There is of course no guarantee that this outperformance will be present in the future although it powerfully illustrates real market conditions and actual returns.

If you’re considering ESG investing, but aren’t sure if it’s right for you, seeking financial advice could help. Working with a financial planner can help you to invest your money in a more sustainable way, so you can rest easy knowing that your portfolio reflects your morals.

Get in touch

To find out more about whether sustainable and ESG investing is right for you, get in touch. Please email us at advise-me@fosterdenovo.com or call us on 0330 332 7866 to speak to one of our team.

Please note:

The value of your investment 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.

The FD Sustainable Dynamic Portfolios are investment portfolios provided by FD Dynamic Portfolios Limited (FDDPL) which is an appointed representative of Foster Denovo Limited (FRN 462728), and 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).

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