ESG investing
Important - The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice. You should seek advice if you’re not sure an investment is right for you.
What is ESG investing?
ESG is an investment approach where investors consider Environmental, Social and Governance factors as part of their wider research. They might think about issues like whether the company effectively manages its carbon emissions, whether it treats its customers, staff and suppliers well, and whether senior managers are incentivised appropriately.
ESG is one of several ways you can invest responsibly. If you want to learn more about how to get started investing responsibly, see our Responsible Investment hub.
Why consider ESG factors?
Taking ESG factors into account when you invest can help to avoid issues later. For example, a mining company might be less likely to face bad press if they have robust environmental and safety policies in place. And it’ll be less likely to face industrial action if it treats its workers fairly. Issues related to the way a company is managed, or its effect on the environment and society can cause reputational damage, impact profits and drag down a company’s share price.
Companies with robust ESG practices are generally seen as innovative and forward-looking, which are attractive qualities in a prospective employer too.
That means ESG-focused employers often find it easier to recruit and retain employees and can attract top talent from a pool of highly qualified candidates. Companies that prioritise ESG also tend to enjoy stronger brand loyalty as consumers increasingly value social and environmental factors in their purchasing decisions. This loyalty can translate into more sustained revenue and market share growth.
ESG – what’s the evidence?
There’s ever increasing research that suggests a link between companies taking ESG seriously and their corporate financial performance.
A 2012 Deutsche Bank study combined the results of over 160 academic studies, research papers and literature reviews. All of the papers they looked at suggested that companies taking ESG seriously tend to benefit from a lower cost of capital – i.e. investors perceive them as lower risk.
- 85% of the papers they looked at suggested good management of ESG issues leads to better corporate financial performance
- 89% of the papers demonstrated a positive link between ESG and stock market performance
However the study also noted that investors weren’t always good at capturing that outperformance.
Other more recent studies have suggested that the stock market is now better at pricing ESG information into share prices. This makes it harder for investors to use ESG analysis to gain an advantage over others. It’s still important to carry out ESG research though. If you don’t it could lead to investors undervaluing companies with strong ESG credentials, and overvaluing those that take ESG less seriously.
There’s also evidence that engaging with companies on ESG issues adds value. For example, a study of investor activity in the extractive sector showed a 4.4% additional return from companies that engaged with shareholders. They also tended to be less volatile than their peers.
It’s tough for individual investors to engage with companies. But when you invest in a fund, you leave that responsibility to a fund manager. They often have a pretty big stake in companies which means they can make sure their voices are heard on issues they think will benefit investors.
Want to learn more?
If you want to learn more about ESG, and Responsible Investing more broadly, check out our Responsible Investment hub.