ESG integration sits alongside traditional financial analysis and due diligence to encompass environmental, social and governance (ESG) factors.
– environmental factors may include issues such as climate change, deforestation, biodiversity and waste management. – social factors may include issues such as labour standards, nutrition and health and safety. – governance issues may incllude company strategy, remuneration policies and board independence or diversity.
ESG integration is about understanding the most significant ESG factors that an investment is exposed to and making sure that an ESG fund is compensated for any associated risk.
Although sustainable investing involves ESG integration, it takes things further by focusing on the most sustainable companies that lead their sector when it comes to ESG practices.
Both the ESG integration and sustainable investing approaches are about engaging with company management to make sure the firm is being run in the best possible way. This can mean challenging a company on its sustainability practices to encourage improvements where necessary.
The screening of stocks and companies occurs when fund managers decide to invest, or not to invest, based on specific criteria.
If a fund manager only wishes to invest in companies that promote workplace diversity the criteria for screening might be substantial representation of women and minorities in management-level positions, and/or the existence of diversity and inclusion policies.
Fund managers will use these factors to deliberately exclude stocks and companies that don’t meet these criteria - this is known as negative screening.
Conversely positive screening is the process of inclusion.
The screening of stocks is commonly used in terms of ethical investing.
Fund managers will 'screen out' companies and stocks that they deem unethical if they don’t fit in with their stated ethics and / or values - this process is commonly refered to as 'value-based investing'.
The "sin stocks” that are typically screened-out include alcohol, gambling, weapons manufacturing, tobacco or adult entertainment companies on immoral grounds.
Impact investing focuses on putting money to work in a way that has a specific, measurable and positive benefit to society or the environment.
Charitable donations however are an altogether seperate issue.
For example if you are passionate about education in a third world country you may want to consider placing investment monies into a fund that targets companies or projects that are working towards delivering quality education in such countries.
The types of companies involved with impact investing tend to be small companies with clear social goals - specialist fund managers typically operate in this market segment.
Fund managers can sometimes have a 'theme' that they are employing within a portfolio.
For example if a theme such as “health and wellness” is targeted fund managers will only want to consider funds that invest in healthy food brands or those companies focused on developing new vaccines.
A further theme example could be “green investing”.
In this scenario fund managers will only invest in companies and technologies that are considered good for the environment for example alternative energy generators or energy-saving technology manufacturers.
Go back in time just a few years and you will quickly observe that the movement of ESG (Environmental, Social, Governance) investing has radically changed from just animal welfare issues to a far more comprehensive set of values and criteria in just a very short period.
ESG investing ia an investment approach which takes explicit account of the environmental, social and corporate governance aspects of all proposed investments.
Common terms to express ESG investing include the following:
To assess a company based on environmental, social, and governance (ESG) criteria, investors (ordinarily fund manager groups) look at a broad range of behaviors that apply to that company in the market sector within which they operate.
Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals.
The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks.
For example, s company should be asking itself whether there are issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?
Environmental factors also now include the contribution a company or government makes to climate change through greenhouse gas emissions, along with waste management and energy efficiency.
Given renewed efforts to combat global warming, cutting emissions and decarbonizing has also become ever more important.
Social criteria looks at a company’s business relationships.
Does the company work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?
Social also includes human rights, labor standards in the supply chain, any exposure to illegal child labor, and more routine issues such as adherence to workplace health and safety.
A social score also rises if a company is well integrated with its local community and therefore has a ‘social license’ to operate with consent.”
With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues.
Investors may also want assurances that companies avoid conflicts of interest in their choice of board members, don't use political contributions to obtain unduly favorable treatment and, of course, don't engage in illegal practices.
Governance is one of the ESG factors where institutional investors can engage companies and open dialogue that can result in meaningful change.
Investment stewardship or corporate governance, is engagement with companies to protect and enhance the value of clients’ assets.
Through dialogue and proxy voting, institutional investors primarily engage with business leaders to build a mutual understanding of the material risks facing companies and the expectations of management to mitigate these risks.
Identifying and managing relevant ESG risks therefore are an important component of the engagement process and to encourage sustainable financial performance over the long-term.
Both TAM International & Momentum Harmony offer ESG driven portfolios - use the buttons below to read more about each comapny's offerings.
Regulatory standards (themselves under constant review by governments, authorities and professional bodies) are demanding ever tighter compliance.
During the recent Covid-19 pandemic an inflection point has been created for many companies and has been a catalyst for change.The following bullet points provide some of the rationale for the surge seen in the ESG investment space.
Covid-19 has highlighted issues related to global pollution - the substantial reduction of pollutants during the pandemic has been noted and many now wish to continue the drive towards a cleaner world.
Stakeholder & shareholder relationships are rapidly changing whereby stakeholders themselves are increasingly demanding compliance with ESG principles.
Governments are demanding ESG responsibility from companies that now require financial support during the Covid-19 pandemic.
Populism and political drivers are very much in evidence driving even greater awarenes of ESG principles.
Aged fund managers are giving way to younger fund managers who themselves are far more focused on ESG responsibility.
Companies having and adhering to ESG principles are increasingly attracting main stream investors.
ESG investing is becoming supercharged with Trillions of USD inflows from across the globe as the switch from mainstream to ESG funds takes place.
Companies looking to transition to ESG principles are most likely to survive in the current market and become stronger over time.
It was once the case that being an ESG investor meant accepting a trade-off when it came to investment portfolio returns. This is no longer the case and recent data illustrates that ESG investment has outperformed traditional equity investment portfolios.
This is no fad. The world is truly in the midst of a climate emergency, which could have drastic consequences for markets, companies and, therefore, our clients’ assets. Mark Carney climate change and financial stability speech at Lloyd’s of London 2019
The evidence on climate risk is compelling investors to reassess core assumptions about modern finance… In the near future, and sooner than most anticipate, there will be a significant reallocation of capital Larry Fink BlackRock Investment Management CEO - January 2020
BlackRock and State Street, two of the three largest asset managers globally, sent open letters to CEOs of large companies identifying climate risk as a priority going into the 2020 proxy season. CEO letters from BlackRock’s Larry Fink and State Street’s Cyrus Taraporevala have now become annual pre-proxy season media events.
BlackRock’s 2020 letter notes that “…we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
State Street’s 2020 letter notes that “…[we will] use our proxy vote to press companies that are falling behind and failing to engage [on sustainability].”
The prospect of a vote against management by an asset manager that controls a larger than 5% stake in most large companies represents a powerful inducement for management to reach understandings with investors that have filed shareholder resolutions addressing ESG issues. This thereby implicitly sets expectations for engagement outcomes, whether undertaken directly or by other investors.
To illustrate further that not only are governments and asset managers forcing change organisations with strong social and ethical principles are also leveraging their strength.
In a recent announcement the CalSTRS (California State Teachers' Retirement System) announced the removal of more than $237 million in tobacco holdings from its investment portfolio after 6 months of financial analysis and deliberations.
If you feel that an ESG portfolio would benefit your investment objectives take a closer look at either of the discretionary managed portfolios offered below.
In the wake of the Covid pandemic many are now realising that the virtues of ESG investing provide both social acceptance and profitability.
In the two Morningstar videos below 'Passive or Active Management For ESG Investing"and "It Is Now Time To Take ESG Seriously" the old myths of ethical investing are firmly debunked whilst direction is provided for the best way to invest with ESG principles.