As the world continues to evolve, so should we. And this includes how we invest.
The start of the new year is typically a time of reflection and equally a time of looking ahead. A time when we consider the choices we have made and things we would like to change. About life on the whole and the details that shape it; a life that to a large part our money enables.
Are you happy with the choices you’ve made? What’s the purpose behind those choices and what value do you want to derive? Is there a particular change you would like to see?
We challenge you to take a moment to consider the values behind your choices in life, and specifically, your investment choices. One of the most pervasive values today is that of being environmentally conscious and enabled in our choices. In line with that, we invite you to consider the prospect of purpose-driven investments.
The growth in sustainable investing
ESG (Environmental, Social, Governance) has become a common acronym in headlines. Growing consumer demand and regulatory pressures are forcing established companies to consider their values and evaluate their impact; it’s also created space for new, ESG-considerate companies to rise.
Consumers are placing pressure on companies to do more, not only by demanding that companies' products and services adhere to ‘green’ practices but also because of their willingness to invest in such companies. As a result, financial institutions have created ESG funds for consumers to invest in.
The younger generation - Millennials, Gen Z, and increasingly women - are also now engaging in investing, specifically sustainable investing. A CNBS report found that this generation’s ‘passion for ESG investing has helped drive a 10x growth in ESG inflows in just two years.
What is ESG investing?
ESG investing can be described in three words – plant, people, and profits. It describes an investment decision-making process that considers environmental, social, and governance factors together with financial factors. Although achieving the rate of return remains the aim of your investment, there is a shift towards considering how a company (that you invest in) generates profits. Beyond wanting to do good, this shift is backed by increasing evidence that ESG factors are key to identifying growth opportunities and material risk - two key pillars for building and maintaining successful companies.
Companies that are focused on ESG are more likely to prosper in the future. Their prioritising of long-term sustainability and profitability over short-term ‘cheap and nasty’ wins, stand them in better stead to succeed – particularly as short-term wins often come with high environmental and social costs.
Let’s break it down:
ESG is wide-ranging with a fair degree of ambiguity and reservation around it. Understanding the fundamental principles behind it enables clarity for better investment decisions.
(E) environmental – conservation of our planet and the natural world.
(S) ocial – concern for people, communities, and societies’ wellbeing.
(G) overnance – countries and company management and decision-making, operations, practices, and procedures.
Why is there long-term value in ESG investing?
In the context of investing, value means different things to different people. Value can come in the form of monetary growth on an initial amount invested, the reduced risk of losing money, or a clear conscience - people prioritise differently based on what is important to them. The value ESG investing can provide is not one-dimensional. Coupled with positive returns, many other sources of value, which are purely dependent on individual preferences, can be satisfied.
The growing demand for ESG-considerate companies and governments will result in huge growth opportunities. This will, in turn, create a substantial flow of capital toward ESG projects. Clean energy has been, and still is, a priority - further to COP26, the world’s richest countries all have net zero targets (the E in ESG). In working to achieve those targets, there is an opportunity for growth.
Businesses have not only recognised that there will be growth but have also recognised the value of people (S – social) in that growth.
The growing demand among consumers for ESG-compliant companies has driven a shift in companies’ mandates. CEOs from some of the biggest companies in the US are now committing to consider stakeholders - such as employers, contractors, and the broader community - ahead of shareholders, people who own shares in a company. They are also working to become more socially accountable. As more companies do this the pressure and demand for others to do so will follow.
In the US, the growth of ESG funds assets under management (AUM) is expected to grow from $4.5 trillion in 2021 to $10.5 trillion over the next five years. This is a far greater growth than conventional AUM. This growth projection reflects the growing demand for ESG companies and products/services.
Long-term business viability
Companies that factor ESG into their practices are more likely to succeed as they are more efficient, have employees that are more satisfied, have better supplier relations, are better aligned with consumer preferences, and are likely to have fewer regulatory risks. It follows then that they are also more likely to survive over a period of ten years.
“Our conviction is that companies perform better when they are deliberate about their role in society and act in the interests of their employees, customers, communities, and their shareholders.” BlackRock, 2021
The increasing demand for ESG funds is driving improvement in regulation. Currently, there are no recognised regulations for ESG compliance and this is a reason why some are apprehensive about including ESG investments in their portfolio.
The Internal Sustainability Standards Board and other regulatory bodies like the Securities Exchange Commission (USA) and the Corporate Sustainability Reporting Directive (Europe) are all working towards implementing a global baseline of sustainability-related disclosure standards. Professional bodies, like the Charted Financial Analyst Institute, are likewise introducing curriculums that cover this field to ensure that those working in it are well-educated and qualified.
That regulation is now being addressed by the industry and changes to the disclosure process are underway, it is highly likely that the predicted growth in ESG funds will be realised.
Improved overall stability
Increasingly, ESG companies are becoming more viable than non-ESG companies as they are less vulnerable to external risks. As a result, ESG funds have broadly been more stable, resilient, and less volatile.
They are, however, still affected by economic, political, and market movements. Every investment will underperform another at some stage - cyclicality is the nature of investing. And ESG funds are no exception. They are still affected by economic, political, and market movements. Yet, according to PwC’s Asset and Wealth Management Revolution 2022 report, 9 out of 10 asset managers believe that an ESG tilt in your portfolio will yield better overall returns.
“ESG has become perhaps the most powerful driver of growth in asset and wealth management. This underlines the importance for asset managers and institutional investors alike to understand how to capture the shift to ESG as a counter-balance to potential portfolio underperformance as well as legacy product obsolescence.” Olwyn Alexander, PwC Global Asset & Wealth Management Leader, PwC Ireland.
What is our philosophy on ESG?
At Foundation, wealth management is about more than just making money last a lifetime. It is about enabling a meaningful life for you and your family, today, tomorrow, and beyond your lifetime. To do this, ESG needs to form part of our holistic approach to wealth. Its increasing growth will, we believe, become a cornerstone in investment portfolios and long-term wealth.
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