ESG investing
What is ESG?
ESG is an investment approach where you take Environmental, Social and Governance factors into account alongside traditional financial factors when making investment decisions. ESG investors believe these factors play an important part in the long-term performance of a company. It covers a range of different topics that vary in importance depending on the company’s size, location and industry.
Here are the three ESG pillars and some examples of the issues they cover:
The different ESG factors
| Environmental factors | Social factors | Governance factors |
|---|---|---|
| Climate change | Human rights | Bribery and corruption |
| Resource depletion | Diversity and inclusion | Remuneration |
| Waste | Modern slavery | Board diversity and structure |
| Biodiversity | Employee training | Tax strategy |
| Pollution | Community engagement | Transparency around governance reporting |
| Deforestation | Health and safety | Supply chain |
| Supply chain and use of third parties | Pay and reward |
How to evaluate ESG
Most companies disclose some degree of ESG information in their annual report, and many now issue a more detailed document covering these factors in detail. At HL, we think taking ESG factors into account is a sensible way to manage long-term risks and opportunities. With that in mind, we incorporate major ESG risks and opportunities into our research. With over 100 stocks under coverage, our share research is a good place to get a handle on specific companies, including their potential ESG risks.
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Data providers like MSCI and Sustainalytics produce free-to-access ESG scores, which rank companies on their performance across these issues. The scores vary between data providers though, because ESG reporting isn’t yet standardised. Despite this, they can be a useful way to compare companies of a similar size in the same industry alongside more traditional metrics. But it isn’t always an apples-to-apples comparison, so without additional background they can be misleading.
What are ESG funds?
If you don’t have the time or expertise to evaluate a company’s ESG credentials, you can let a fund manager do it for you. Most mainstream funds incorporate some degree of ESG integration. But how heavily each manager weighs these risks within their analysis will vary.
There are a wide variety of options to suit a range of preferences. A good place to start your search is our Responsible investment hub – it has everything from how to get started investing responsibly to helpful tips and fund ideas.
This is not personal advice. All investments can fall as well as rise in value, so you could get back less than you invest.
How does ESG relate to Responsible investing?
ESG integration is one of many ways to use your investments to benefit society as well as yourself. It can be used on its own, or together with other Responsible investing approaches.
Other Responsible investing approaches include:
Stewardship
Stewardship is a way of interacting with a company in which you own shares to drive positive change for the benefit of all stakeholders. This can be anything from coaxing a business to improve its disclosure to opposing the way CEOs are paid. Most mainstream fund managers conduct stewardship activities.
Exclusions
Some investors may decide to avoid specific companies or industries that do harm to society. This can include controversial sectors like weapons or tobacco. This is also known as negative screening.
Sustainability Focus
Sustainability Focus funds invest mainly in companies that are sustainable for people or the planet. Examples include companies involved in producing energy from renewable sources, such as solar, wind or hydrogen. Funds taking this approach will be marked with a ‘Sustainability Focus’ label.
Sustainability Improvers
Sustainability Improvers funds mainly invest in companies that might not be sustainable now, but aim to improve their sustainability in the future. Examples can include companies that are on a credible path to net zero by 2050, or are committed to improving social standards. Funds taking this approach will be marked with a ‘Sustainability Improvers’ label.
Sustainability Impact
Sustainability Impact funds invest mainly in companies providing solutions to sustainability problems, with an aim to achieve a positive impact for people or the planet. Examples can include social housing companies. Funds taking this approach will be marked with a ‘Sustainability Impact’ label.
Sustainability Mixed Goals
Sustainability Mixed Goals funds invest mainly in a mix of companies that are sustainable, aim to improve their sustainability over time, or aim to achieve a positive impact for people or the planet. Funds taking this approach will be marked with a ‘Sustainability Mixed Goals’ label.
Related topics
Read more related glossary terms
Funds
A fund is a collective investment that pools together money from lots of individual investors. Learn more about the different types of mutual funds and how they work here.
Shares
Shares represent part-ownership of a company. As a shareholder you own a ‘share’ of the business, and the monetary value attached to it, which can be sold to other investors.