ESG investing: Going beyond good intentions to real impact

Many investors incorporating ESG (environmental, social, and governance) factors into their decisions want to have a positive influence on the world. However, in some cases, there can be a gap between intentions and measurable impact.

So, whether you want your investments to support efforts to address climate change, promote fair labour practices, or encourage strong corporate governance, you might benefit from assessing the real-world outcomes your investments generate.

ESG investing could balance your financial goals and values

When you’re investing using an ESG strategy, you typically have a double bottom line – you want your investments to deliver a financial return that will support your goals and align with your values.

ESG investing can achieve this, but it’s not always straightforward. 

For example, based on ESG scores, you might believe that your investments are having the impact you want. However, different rating agencies can score the same companies differently depending on their respective focus. So, it may be useful to set out what areas of ESG are most important to you. 

Similarly, a company’s corporate social responsibility (CSR) report might suggest they’re aligned with your ESG values. Yet, when you dig deeper, the actual impact isn’t what you expect. 

Some firms may engage in “greenwashing”, where they present their operations as more environmentally friendly or sustainable than they actually are. 

So, how can you see past simple box ticking to assess the impact of your ESG investment portfolio? Here are five steps to take.

1. Clarify your ESG investment goals

One of the first steps to take is to decide what your ESG investment goals are. Simply stating that you want your investments to “be more sustainable” could make it difficult to measure the impact and whether you’re achieving your goal.

Instead, you might set out goals like:

• Reducing carbon emission exposure
• Promoting gender diversity in leadership
• Supporting fair wages across supply chains. 

Your financial planner may then help you translate these values into investment criteria and a long-term strategy that suits your needs. 

2. Examine your current investment portfolio 

If you already have ESG investments, now might be a good time to review them and assess if they align with your goals set out in step one. This approach could help you move beyond investing because an opportunity has an ESG label towards examining measurable impacts.

With your financial planner, you might review your current holdings and compare them against your criteria. You might also want to consider if there are sectors you want to avoid or limit exposure to, such as fossil fuels.

3. Focus on ownership

ESG investing doesn’t only involve buying and selling investments that reflect your ESG criteria. Investors can also influence how a company behaves through active ownership. 

For example, if investors place pressure on an energy company to focus on renewables over fossil fuels, they may encourage a shift within the firm.

As this strategy relies on shareholder power, it’s often most effective for large asset managers, but that doesn’t mean it’s not relevant for individual investors. As part of your investment portfolio, you may invest in a fund. So, choosing a fund that uses its shareholder power could support your overall ESG aims.

4. Consider thematic allocations 

Thematic investing is a strategy that focuses on long-term structural changes, rather than sectors or regions, and it may be a useful approach for ESG investors who want to maximise their impact.

Rather than allocating a portion of your investments to emerging markets or a particular industry, you might choose a theme that aligns with your values. For instance, themes may include clean energy, water infrastructure, developing communities, or sustainable agriculture. 

With this approach, your investments would focus on solving a particular challenge, which can make measuring your impact simpler. 

Your financial planner can help assess what percentage of your portfolio you might allocate to specific themes, and how to achieve this. 

5. Stay engaged

Finally, as government regulation and business practices change, you might find how your portfolio aligns with your values shifts over time, or that new opportunities which suit your overall strategy emerge.

So, scheduling regular reviews with your financial planner could help you stay engaged with your ESG strategy and reflect your long-term needs.

Consider your risk profile and goals alongside ESG criteria 

When you’re assessing investment opportunities against ESG criteria, remember it’s still important to consider your risk profile and investment goals.

An investment that delivers an ESG impact isn’t automatically right for you, even if it aligns with your values. For instance, it may involve a higher level of risk than is appropriate for your investment goals, financial circumstances, and investment time frame.

Get in touch

If you’d like to discuss ESG investing or have us review your current investment strategy, please contact us. 

Please note: This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

The value of your investments (and any income from them) 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. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.