My colleague Oliver Jones last week presented to over 100 leading Irish financial advisers at the excellent Lets Talk Investments conference on the topic of demystifying ESG, Sustainability and Impact Investing. It set off some interesting conversations throughout the day with advisers over coffee. Clearly there is almost equal parts scepticism and belief in this as a fundamental cornerstone of investing rather than just a fad, however, there is also a fair bit of misunderstanding, a lot of which has been fostered by the marketing departments of investment management firms, political discourse, and media coverage of this space.
In today's investment landscape, Environmental, Social, and Governance (ESG) criteria have gained significant traction. While more recently associated with cultural and political agendas, particularly in the US, the essence of ESG investing extends far beyond politics.
At its core, ESG investing is about evaluating a company's sustainability and ethical practices and weighing up the associated risks and opportunities against the current share price but it has become a catch all term that is used interchangeably with terminology like Sustainable or Impact investing. It's not about taking sides in cultural arguments but rather about identifying companies poised for long-term success.
Environmental factors assess a company's stance on issues like climate change and resource management. Social considerations look at how a company treats its employees, suppliers, customers, and communities. Governance criteria evaluate leadership quality and adherence to ethical standards.
This isn't just about ethics; it's about smart investing. Companies that prioritize ESG factors may often be better at managing risks and seizing opportunities. For example, those with strong environmental practices may be more resilient to regulatory changes or climate-related disruptions.
Moreover, ESG-focused companies are attracting capital from investors who recognize the potential for sustainable returns.
As consumer awareness grows, businesses with strong ESG values may also benefit from enhanced brand reputation and customer loyalty.
It often shocks people to realise that an unashamedly carbon belching company could make it through a purely ESG filter if the stock price was attractive enough and there is no overlay of exclusions or consideration of ‘values’!
In essence, ESG, Sustainable and Impact investing focuses on fundamental principles of sustainability, responsibility, and long-term value creation. If an issue is more about specific personal values or politics than it is about share price performance, then it is not ESG. By considering not only financial metrics but also environmental, social, and governance factors, investors can contribute to positive change while potentially enhancing their investment portfolios. In an era marked by global challenges and societal transformations, ESG, Sustainable and Impact investing offers a pathway towards a more resilient and equitable future – but the three approaches are focused on different ways of navigating this journey.