FINANCIAL ADVICE CENTRE NEWS
Your Autumn Newsletter 2020
Your Adviser Discusses
Environmental, Social and Governance (ESG) investing for our clients
Last year the European Commission, in conjunction with the European Securities and Markets Authority, proposed changes to bring financial advice firms into line with the EU’s climate action plan through the integration of sustainability and Environmental, Social and Governance (ESG) considerations.
EU parliamentary regulations stated advisers should ‘take sustainability risks into account in the selection process of the financial product presented to investors before providing advice. That means that as advisers we must ensure we ask clients if they have a preference towards ESG investing and ensure we can provide access to these types of investment opportunities.
So what is ESG investing?
These funds employ positive screening, evaluating and investing in funds and in turn firms, that are paying close attention to the impact they make on society and the environment.
ESG factors are useful indicators of a company’s overall strength, how it is likely perform in the future as well as the material influence on its ability to deliver long-term returns to its investors. Successful ESG strategies are now regarded as the long term future for our society and their financial success reflects this.
ESG factors are constantly evolving but can include:
Environmental – a company’s approach to conservation and sustainability:
• management of waste and pollution, including greenhouse gases
• contribution to or controls of impact on climate change
• management of natural resources including water
Social - a company’s consideration of people and relationships:
• treatment of employees and their working conditions
• valuing human rights and its stance on child labour and slavery
• considerations as to impact on wider stakeholders and society, including local communities and animal welfare
Governance – a company’s standards for the way they run their business:
• approaches to diversity and how it structures its board
• rewards and payment of executives
• limits its exposure to corrupt practices and deals with bribery
• makes, declares or avoids political donations
The benefits of ESG investing
There are many benefits to ESG investing which I briefly summarise below.
Opportunity for better long-term returns
There is now a weight of research showing companies that take their ESG responsibilities seriously are more likely to outperform their less well-managed peers. Selecting companies that focus on the social and economic impact of their activities does not have to mean compromising on performance; in fact quite the opposite can be true.
An indicator of quality
ESG factors can also be excellent indicators of any ‘red flag’ warnings that could affect future investment performance of a company, such as deterioration in operations or possibility of bankruptcy – ultimately helping reduce long-term investment risk.
Companies that take their corporate responsibilities seriously tend to operate more openly, have measurable outcomes and are able to publicly communicate their ESG practices. By their very nature these businesses are more transparent.
I am pleased to say that Financial Advice Centre is well ahead of the curve in engaging with fund managers committed to ESG investing and adopting the highest possible standards such as signing up to the United Nations Principles of Responsible Investment.
We have created a factsheet that explains a bit more about ESG investing; how me work with fund managers and some questions for you to consider which we can speak about if this is of interest. Please visit our website or speak to me about how I can help you understand this further.