Environmental, Social and Governance 101: What is ESG Investing?

November 22, 2021

Given all the recent headlines about COP26, we thought we’d talk about one way you can help support a move towards a more sustainable future.

ESG investing, which stands for Environmental, Social and Governance, is a style of investing which focuses on different aspects of companies over and above their stock price or profits.

An ESG investment strategy is all about choosing to put your money in companies that are striving to make the world a better place. But, this isn’t just about giving to charity. It’s still a money-making investment strategy. The theory behind the strategy is that companies that do good will ultimately succeed over the long run.

So, let’s go a little further into what ESG investing is based on, and what it looks like in practice.

What is ESG?

To best understand ESG investment strategies, it’s worth taking the time to go through each aspect of it separately. ESG is a broad group of strategies, and many people will place different emphasis on each strand, depending on their personal beliefs and financial goals.

The first part of ESG investing looks at a company’s environmental credentials. This is all about things like carbon footprint and sustainability within the supply chain. It may include both companies which are actively attempting to work on sustainability as their core business model, as well as companies who are attempting to manufacture their products in the most sustainable way that they can.

The social aspect of ESG investing is all about looking at the company’s social impact. This means things like equality and working on social issues like racial or gender diversity, fairness in hiring practices, and initiatives on wellbeing and wellness at work. It may also include factors like how well the company advocates for social good outside of its business.

Governance is about how well the business is run at executive and board level. This section is about following best practices for executive pay and diversity in leadership. It can also refer to how the company’s leadership interacts with the shareholders.

How does ESG investing work?

In general, ESG investing relies on independent ratings which assess companies based on each of the three strands we’ve discussed. You could either put your money in funds which only invest in companies with scores above a certain number, or you could do your own research and choose companies with high independent scores and invest in them.

ESG investing is becoming more and more popular, and there are a lot of funds out there which talk about using an ESG strategy. However, there are lots of variants focusing on different things, and lots of different criteria are in use – so it’s important to ensure that the fund you choose aligns with your beliefs or strategy. Some funds may talk a lot about ESG investing, but it’s actually only a small amount of the fund that targets these companies, for example.

Different variants of ESG investing will often focus on different things. For example, some are laser focused on environmental issues, and will invest in companies which score highly on the environmental criteria and are working on carbon negative initiatives. Some funds may choose to not invest any money whatsoever in fossil fuel companies, even if they score highly on ESG ratings.

What are the benefits of ESG investing?

People invest using ESG frameworks for a number of reasons. Often, it’s about taking an approach to your investment portfolio that mirrors your own morals and values. With many more people being concerned about climate change, people with investment portfolios want to have the option to specifically invest in companies that are as sustainable as possible.

However, ESG investing is also a serious investment strategy for those looking to grow their portfolios. The underlying theory is that companies with good governance, good social responsibility and good sustainability practices are actually likely to overperform in the market over companies without these things. So, ESG investment is a strategy that rewards companies looking long term, and aims to invest in them and bet that they will grow over time.

At GreenSky Wealth, we offer a range of ethical and ESG investments, and we can work with you to develop an investment strategy that you’re comfortable with. Find out more on our investment page.

The value of your Investments and the income from them can go down as well as up.