Q&A: What is ESG investing?

There are a variety of different investing philosophies within the responsible investing realm. One method you may have been hearing about more and more is ESG investing.

What is ESG?

ESG stands for environmental, social, and governance. Investors who use this approach incorporate information about a business’ operational performance across the three pillars:

  • E – Environmental factors such as a company’s carbon footprint, water footprint and waste management policies.
  • S – Social factors such as labour standards in their supply chain, data protection and the health & safety of employees.
  • G – Governance factors such as independence & composition of the board, lobbying, bribery and corruption.

How does it help?

It seems commonsense that the way companies treat their employees, their negative environmental footprints and the way they are governed can affect companies’ financial performance. If managed badly, these behaviours are risks that can damage a company’s reputation, lead to litigation costs and result in lower productivity.

By using this extra ESG information, investors can price these risks into their investment decisions. A recent study has shown that 84% of asset managers use ESG information in order to improve long-term investment outcomes for clients, and 66% agreed that ESG risks and opportunities can make a difference to returns in the short- and medium term.

Why the the surge in interest?

Consumers and investors alike are increasingly holding companies accountable for their performance on environmental, social and governance benchmarks. You might feel that a company that’s an actively good steward might be more deserving of your money.

ESG leaders’ are also generally better managed businesses, and investing in those companies that are improving their ESG risk management has shown to produce greater investment upsides.

How is ESG different to sustainable investing?

ESG integration as an investment tool is very different from sustainable investing. While some ESG factors do describe aspects of company sustainability, its aim is to unlock factors that affect financial performance only. For example, an excellent ESG integrated strategy may still invest in sectors that you may consider unsustainable – like tobacco manufacturers or fossil fuel extractors.

How about EQ’s approach?

We have committed to integrate ESG across all of our fund research, conviction and monitoring processes. We evaluate fund managers on their ESG integration processes and engage in order to improve any weaknesses to best-practice. EQ is a signatory of the UN PRI, and thus will report on our ESG integration process in manager selection and portfolio management.