Nov 15, 2021 | BEN WAITE
As climate change continues to be in the headlines, particularly with the recent COP26 meeting in Glasgow, we thought it’d be helpful to revisit the subject of ESG investments. In our experience, more wealth clients are expressing an interest in using their investments to make a difference for future generations. Using their money not just to secure a financial inheritance to be passed on, but also to help protect the planet for their children and their children’s children.
‘ESG’ – the latest abbreviation to hit the wealth management scene. It stands for environmental, social and governance and you may have seen it referred to as ‘socially responsible investing’ or as having an ‘earth portfolio’.
So, what does it mean?
Put succinctly it looks at the sustainability and social impact of investing in a certain company.
For example, an ESG investment portfolio would avoid ‘sin stocks’ i.e. companies engaged in things such as weapons, tobacco, fossil fuels and so on.
Why are we talking about it now?
Well, it’s becoming increasingly popular! Studies estimate that assets invested in ESG funds form between 30% to 40% of the $100 trillion of global assets under management worldwide. We believe this trend will continue as people turn to more sustainable ways of living.
We’ve also developed our own ESG portfolio that sits in line with our six guiding principles of investment.
Does having an ESG portfolio affect returns?
The answer to this, as always, lies in looking at the academic and empirical evidence. Some fund managers claim there is an extra return premium for investing in highly rated ESG companies – an extra return for doing good and attracting more funds. Others suggest investors may have to accept some under performance because they’re avoiding certain stocks or sectors.
The long-term evidence suggests that neither of these views is correct!
Overtime, history suggests ESG portfolios should perform around the same as a more conventional portfolio equivalent, albeit with some shorter periods of under and outperformance due to the ESG screening. Overall, the possibility of under performance as a result of having an ESG portfolio, is likely to be relatively small over the longer term.
What are CW doing about it?
It’s worth mentioning that our existing portfolios have a low exposure to the ‘sin stocks’ we spoke about before. However, for those wanting to ensure their investment strategy aligns with ESG we have created a bespoke model portfolio.
Importantly, an ESG portfolio can still be tailored to your appetite for risk and it will still be based on the same investment philosophy as our conventional model portfolios.
What next for investors?
If the interest in ESG increases, more and more companies will begin to adhere by the requirements of sustainability. Ultimately, this will also mean greater fund availability in the ESG space.
As always, any decisions about how to invest your money is a personal choice and one that you should discuss with a professional.
There is no right or wrong answer here but as you start to see more and more in the press about ESG, you may wish to get in touch to discuss how it could tie in with your current or future investment strategy.
Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.