What is ESG investing, why is it important, and why is greenwashing a risk?
Folk in financial services love an acronym and in this example, ESG is no different. For reference, ESG stands for ‘environmental, social and governance’ when investing money into things like pensions and ISAs. You might be aware that ESG investing has correctly come to the fore, and it will be good to see how the dynamic of all three elements evolve as we progress, particularly social and governance, to make this future growth fair and sustainable, perhaps for the first time ever.
The three factors of ESG are central to the measurement of the sustainability and environmental impact and behaviour of a business/company. The term ESG has been around for quite a while, and it is now an important investment factor to consider from the start of 2021. ESG measurements are designed to help better determine the future financial performance of companies, arguably noting that this is just good corporate social responsibility, but it is also the need to think long-term. If you are interested in ESG investing and want to understand how the metrics can be measured, then the following weblink may be helpful: https://www.msci.com/esg-ratings
We believe it is also important not to mix ESG with ethical investing. Both add additional parameters to investing to ensure that money invested meets an agreed standard or target, but the two focus on different factors. A good article / webpage on ESG investing, updated in July 2020, can be found at Aviva's website (not an endorsement) here: https://www.avivainvestors.com/en-gb/about/responsible-investment/our-approach/esg-alternative-assets/
Sadly, as with most change, there is always the risk that some will use rule changes and initiatives to push their products and services without really buying into the core principle of the objective. In the case of ESG, the risk is referred to as ‘greenwashing’, effectively presenting or repackaging your offering as suitable in the ESG marketplace, without actually being suitable. And greenwashing is real, with investors watching for this because it breaks the ethos of all that they seek to achieve through investing. Most capital projects in life start and end with money, so getting it right at the outset is vital, and it is disappointing to see greenwashing as a possibility.