ESG Investing

Date posted: 7th May 2021

Ethical and Sustainable Investing

Even before the global pandemic an ever increasing question on our client’s minds has been around ethical and sustainable investing. Whether it has been David Attenborough’s ‘A Life on Our Planet’ or watching the Black Lives Matter protests on the news that has sparked the question, it is an area that our clients are showing a greater interest and want to learn more about it.

2020 has proved an inflection point for sustainable investing. The pandemic has put a spotlight on our relationship with the planet, while specific events such as the Australian bushfires and Californian wildfires clearly showed the consequences of doing nothing. Environmental campaigning took on a new urgency, while governments promised to ‘build back better’ in the wake of the pandemic with huge commitments to green energy and sustainable development. Good companies focused on employee well-being through an unsettled time, but the crisis also exposed poor labour practices and saw company share prices punished for it.

Here I try and give a brief introduction into this type of investing and explain some of the buzzwords in this sector which often cause confusion.

Navigating the ‘green maze’

Not only has clients’ interests increased in this sector there has also been large inflows over the last five years. In fact Environmental, Social and Governance (ESG) investing has seen significant inflow of assets over the last 5 years and according to Morningstar assets in ESG funds reached $1.65 trillion at the end of 2020. The below graphs shows the growth in global ESG ETFs (Exchange Traded Funds) the last 5 years:

Despite the positive momentum behind the wider sector, investing in this area of the market still presents investors with a ‘green maze’ of investment approaches and buzzwords which result in confusion. With so many initiatives around the world, so many acronyms and so many new terms, this isn’t at all surprising. The industry has grown quickly and chaotically. It is still missing standardised definitions and clear guidelines, which has allowed a variety of interpretations and accusations of ‘green washing’. Here I highlight some of the common phrases and approaches associated with ethical and sustainable investing:

Ethical: Ethical is the oldest form of investing in the sector and focuses on negative screening of ‘sin’ sectors. Subjective investor preferences and fund definitions of ‘ethical’ differ widely as a result.

E.S.G :Environmental, Social and Governance (ESG). This is where investors use the ‘three pillars’ to evaluate a company or country. This style of investing involves integrated ESG risk analysis, where a company’s actions are reviewed alongside their measurable environmental and social outcomes – ‘the triple bottom line’.

Impact Investing: Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.

Responsible Investing: This is commonly defined as a strategy and practice to incorporate ESG factors alongside purely financial considerations in investment decisions and active ownership.

We believe experience matters in this part of the market because incorporating ESG considerations into portfolio isn’t straight forward and can have unintended consequences. Investors need to be really clear about the impact of their investment choices and restrictions through the market cycle.

How do ethical and sustainable funds work?

When I talk to clients about choosing an ethical or sustainable investment fund it is important that the client thinks clearly about their motivation. Does a single issue, such as the environment, matter more than anything else? Or are they looking for a broad-based approach to investing ethically and sustainably? Are they looking for their capital to have a positive impact on society?

The investment policies of funds in this sector are frequently split into three groups to highlight the strength of the ethical criteria they follow. The scale is helpful when trying to compare funds, but more importantly, it helps guide investors with a particular moral stance from inadvertently investing in a company or sector they wish to avoid.

The three groups are as follows:

Dark green: This is the strictest form of criteria. Typically the fund manager is unable to invest in a substantial part of the market, particularly the alcohol, defence, gambling, mining, oil and gas and tobacco sectors.

Mid-green: As the name suggests, these funds are in the middle when it comes to strictness of ethical criteria. They focus on most of the issues considered by dark green funds, but they may include some exposure to oil and gas, financials and pharmaceuticals.

Light green: The least strict of the ethical criteria. Light green funds tend to focus on best in class ESG and can invest in sectors that ethical investors may be uncomfortable with. They are typically more closely aligned to mainstream funds and indices.

I have always looked to incorporate clients’ individual values into how we invest for them. As long-term stewards of their assets, the sustainability of companies has always been an important consideration within our process.

Tilney’s approach

At Tilney we manage a range of ethical and sustainable investment portfolios for clients. The majority of investments held in these portfolios are included for positive reasons.

The sustainability themes that we seek exposure in are:

• Life essentials – affordable housing, healthcare, safety solutions, sustainable food and water management
• Environment – alternative energy, biodiversity, climate change solutions, resource efficiency, sustainable transport
• Economic development and ending poverty – human rights, infrastructure, financial inclusion, digital divide, education and lab

There are several ways to make ethical and sustainable investments with Tilney. You can invest through an ethical and sustainable managed portfolio. Our portfolios invest in a diverse range of funds and they are actively managed by our experts. If you have more specific requirements, we also offer bespoke portfolios that are tailored to your individual needs and circumstances. These portfolios may invest in individual equities as well as funds.

Matthew Burgess

Investment Manager

Email: Matthew.Burgess@tilney.co.uk

Tilney Investment management Services Limited

For further information about us go to www.tilney.co.uk

Issued by Tilney Investment Management Services Ltd, authorised and regulated by the Financial Conduct Authority. Investments go down as well as up and you may not get back the amount originally invested. Past performance is not an indication of future performance. This article is not a recommendation to take or refrain from taking any course of action. It is based on our opinions which may change If you are in doubt as to the suitability of an investment please contact one of our advisers.