ESG INVESTING 1. WHAT’S THE DIFFERENCE BETWEEN ETHICAL, RESPONSIBLE AND SUSTAINABLE INVESTING AND ESG INVESTING? Some form of investing, on the basis of beliefs, has been around since Islamic banking prohibited investments in alcohol, gambling and pork, back in the 7th Century, but the term ESG is less than 20 years old. Many different terms have been utilised for investing in a more responsible way over the years. ‘Ethical’ Investing tended to be used historically for portfolios which excluded shares in firms perceived to be ‘bad’, such as fossil fuels or animal testing. ESG (Environmental, Social and Governance) is a term used most commonly for portfolios being offered today. Whilst some companies are excluded , these portfolios tend to be much more proactive in engaging firms to change for the better, rather than just excluding them. This engagement process can create real change. To clarify the terminology; The ‘Environmental’ covers a range of aspects, but the focus is particularly on reducing carbon emissions, avoiding biodiversity loss and resource depletion. ‘Social’ refers to issues such as health and safety for workers and avoiding slavery and child labour. ‘Governance’ issues include executive pay, business ethics and transparent disclosure of information. The term ‘responsible’ investing is helpful in being a more over-arching term for all of the above, and is a way of introducing these topics without, for example, having to explain what the E, the S and the G mean. 012 P R O S P E R I T Y N E W S L E T T E R
2. DOES AN ETHICAL INVESTING STRATEGY MEAN SETTLING FOR LOWER RETURNS? No, there is really no evidence to support this. At AG we focus very much on what the evidence tells us and use this as the basis for our investment philosophy. Historically, as mentioned above, a pure ‘exclusionary’ portfolio may have meant lower expected returns, because the pool of firms whose shares make up your portfolio was smaller. Many people now believe that more sustainable portfolios will do better in the future, and it is hard to argue this logic, after all, no company was ever penalised for being too sustainable. The public are more aware than ever, and evidence suggests a significant move of consumers away from those firms not showing their ESG credentials. Recently ESG portfolios have outperformed similar non-ESG ones, although this has been more to do with chance in the short term; those sectors which have done well in the last 12 months happen to be those which are more aligned with ESG principles. So, whilst only time will tell (and of course nobody can make any guarantees), it does not appear to be the case that a more sustainable portfolio will do any long-term harm to your returns. 3. HOW DO FUNDS MEASURE COMPANIES’ PERFORMANCE IN ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) AREAS? - HOW DO YOU GUARD AGAINST ‘GREEN WASHING’! This is quite a complex area. A portfolio is typically made up of a very large number of equities (shares) . Each and every company whose shares make up the portfolio are judged by ratings agencies on their ESG credentials. These can vary
