Young investors are championing the “S” in ESG investing, so what does it mean?
by MATHEW ANGELL, Dip PFS
ESG investing means considering environmental, social, and governance issues when investing. While ESG encompasses a wide range of issues, there’s often a focus on the environmental aspect, from climate change to plastic pollution. However, that could be about to shift.
According to a report in FTAdviser, young investors are placing more importance on social factors.
In a survey, 57% of investors under the age of 45 said their preference was social impact investments rather than environmentally motivated ones. Among the under-25s, this rises to 67%.
There are plenty of reasons why younger generations are keen to focus on the social aspect of ESG investing.
Improvements in technology mean people are more aware than ever of the issues others are facing, including those they may not cross paths with day to day. This is likely to have played a role in investors wanting their decisions to have a positive effect on people and communities.
It’s an extension of a trend that’s already seen in retail. You may choose fairtrade products when you’re in the supermarket because you want to ensure farmers receive fair compensation for their work. Considering social issues when making investment decisions can mean you invest in companies that reflect your values.
As younger generations begin to accumulate wealth and invest, their attitudes and priorities could lead to a shift in the ESG challenges that are most discussed.
Social issues in ESG investing cover a wide range of complex topics
When investing, considering the social issues means assessing how a company manages its relationships with its workforce, the communities it operates in, and the political environment.
Much like environmental issues, the social aspect of ESG covers numerous, complex challenges.
Investors focusing on the “S” may have very different views about what the most important topics are, and which companies are responding appropriately to them.
The FTAdviser report asked investors which issues were a priority for investment, including:
- Health and wellbeing
- Domestic violence
- Social inequality
- Racial inequality
- Income and financial inclusion
- Youth unemployment
- Childhood obesity
- Community resilience.
How a company manages relationships with people and communities can have a direct effect on how it operates and its profitability. For example, could poor labour conditions mean that a company could face a boycott, reputational damage, or struggle to retain skilled employees?
How a company responds to global and local events may also fall under social issues.
A recent example of this has been how companies responded to the conflict in Ukraine. Those that offered support to Ukraine or quickly limited or halted operations in Russia were often praised in the media, while some of those that didn’t react faced criticism that could have a knock-on effect.
Social issues don’t stand apart from the other two pillars of ESG either. Poor environmental practices, for instance, could harm communities. Governance covers how a business is run, which can directly affect social issues.
So, considering social issues when investing isn’t always straightforward.
3 things to consider if you want to incorporate social issues into your investment portfolio
1. Which ESG issues are important to you?
As mentioned above, many topics may be considered under the social pillar of ESG. So, setting out what your priorities are is important. This can help you identify investment opportunities that align with your values and ESG goals.
However, you should keep in mind that you may need to make compromises. Business operations are complex, and investments may not tick all your ESG boxes.
A short list of key issues that you want to focus on can help you assess which investments are right for you from a values perspective.
2. Could an ESG investment fund be appropriate?
You don’t need to invest in individual stocks to make ESG part of your investment portfolio. There’s a huge range of ESG investment funds that you can choose from.
A fund allows you to pool your money with other investors to invest in a greater range of businesses and spread investment risk, with the fund making decisions about which companies to invest in.
A fund that considers ESG issues will set out its criteria. So, you can see if this aligns with your views.
3. How does the investment align with your risk profile?
As with any other investment, you still need to consider the investment risk involved even when you’re incorporating ESG issues.
All investments have some level of risk, and while an investment opportunity may align with your ESG goals, that doesn’t mean it’s right for you. It’s important to understand what your risk profile is and the risk level of investments you’re considering to ensure they are appropriate for you.
How to make ESG part of your investment portfolio
If you have any questions about how to make ESG issues part of your investment portfolio, we’re here to answer them. We’ll help you understand what your options are and how you can build a portfolio that not only reflects your values but will support your financial goals too. Please contact us to arrange a meeting.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
ABOUT THE AUTHOR
MATHEW ANGELL, Dip PFS
Director & Financial Lifestyle Planner
Matt’s goal is to help you develop great financial habits and make sure your life is at the forefront of all plans that are put in place. His vision is to be your trusted partner through your life, there to help you through the difficult times and appreciate the good.