The Savvy Investor ESG and Ethical Investing section captures the latest articles, white papers, thought leadership, and commentary on the rapidly developing environmental, social and governance themes that influence the decision-making of today’s institutional investors.
ESG and Ethical investing aims to generate returns through the ownership of financial entities whose operations promote and practise the highest measurable standards of ESG principles. ESG considers the ‘ethical’ and ‘socially responsible’ investment, or SRI, philosophies which ground investments in ‘pure’ and ‘green’ qualities. Like ethical investment, SRI avoids socially questionable investments such as tobacco, gambling, or arms manufacturing. SRI is more inclusive than ethical investment, however, and aims to find investments which have a favourable impact on society e.g., investments in recycling or renewable energy...
Companies eligible for inclusion in ESG investment funds must be able to demonstrate the ‘three pillars of ESG’ and publish their associated ESG risk factors.
To ensure fund managers can demonstrate accountability and a robust ESG investment process, investors must constantly monitor and evaluate the ESG risk factors.
Following the creation of The UN’s Principles for Responsible Investment (PRI) in 2006, the asset management industry has created the cornerstone of a green finance future. The UN’s Sustainable Development Goals (SDGs) together with the PRI have further cemented this initiative.
For ESG smart beta managers, ESG scoring is crucial in determining the ‘tilt’ or underweight/overweight position of ESG risk factors in a portfolio.
ESG and Ethical Investing pertain to:
- Environmental e.g., practising care for the climate and environment through responsible use of natural resources, minimisation of waste, recycling, saving water, and reducing CO2 emissions, impact investing, net zero
- Social e.g., practising fairness for all through the promotion of gender equality and diversity, employee rights and good working conditions, charitable initiatives, and demonstration of anti-corruption measures
- Governance e.g., practising prudent board remuneration, board diversity, and demonstrating detailed accountability to shareholders and other stakeholders, stewardship
More discrete topics under the ESG umbrella also cover the future of green finance together with Islamic finance and fossil fuel divestment. Cleantech, which covers institutional investment opportunities in low carbon investing and renewables and well as the mitigation of climate change through green bonds and green buildings to sustainable real assets such as farmland and forestry.