Investing according to environmental, social and governance principles (ESG) has been a fast growth area, according to figures1, UK-based ESG funds saw record inflows between March and July 2020, with £362m invested in July alone.
What is ESG?
The acronym, ESG, refers to three key factors used by investment companies to evaluate corporate behaviour:
- Environmental criteria – such as: carbon emissions, waste management and air/water pollution
- Social criteria – such as: human rights, labour standards and data security
- Governance – such as: board diversity, business ethics and executive remuneration.
By assessing these factors, investment companies measure the sustainability and ethical impact of an investment.
ESG has developed from Ethical Investing using positive screening to be a focus for individual companies, countries and therefore for investors.
Risk and performance
In the early days of sustainable and ethical investing there was a perception that investors were putting principles before profit, with such investments generally considered to be higher risk than their traditional counterparts. Nowadays, with a much wider choice of ESG products available, this style of investing is capable of generating long-term stable and sustainable returns.
A matter of principle
Selecting investments based on ESG principles offers no guarantee of performance but, as part of a diversified portfolio, they can allow you to make a positive impact without having to give up on the hope of good returns.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.