Environmental, Social and Governance (ESG) Investing

18 May 2023

ESG investing is where consumers invest in companies that strive to make the world a better place. Investors rely on independent ratings that review the behaviour of company policies when it comes to environmental performance, social impact and governance issues. Clients then invest in companies that score highly on environmental, societal and governance scales. ESG investing addresses how a company serves all of its stakeholders: workers, communities, customers, shareholders and the environment. Mike Walters, CEO of USA Financial, believes that companies that put in the work to balance the benefits for each of their five stakeholders simply become well-run companies, and in turn, well-run companies become good stocks to own.

Detailed below are some of the criteria used to evaluate companies to ensure that they meet ESG investing standards:

Environment: This looks at the impact the company has on the environment and issues such as carbon footprint, toxic chemicals involved in manufacturing and sustainability efforts.

Social: This looks at the social impact the company has on the broader community as well as its own work culture. LGBTQ equality, racial diversity, inclusion programs and hiring practices are considered in this section as well as how the company advocates for social good in the wider world.

Governance: This area looks at how management within the company drives positive change. Issues such as executive pay and diversity in leadership are reviewed along with leadership interaction with shareholders and the wider community.

ESG research firms review areas such as annual reports, financial management, board structure and compensation to deliver a wholesome evaluation of a company. Scores are produced for each company based on their ESG rating. Scores generally follow a 100-point scale: the higher the score, the better a company performs in fulfilling specific ESG criteria. Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI and Refinitiv are a few of the most well-regarded ESG research companies.

The ESG sector has soared in popularity in recent years. According to Morningstar global ESG fund assets reached about $2.5 trillion at the end of 2022, up from $2.24 trillion at the end of the third quarter. The nearly 12 percent jump in assets was almost double the growth of the broader global fund market. Growth however has been primarily driven by Europe, with the region accounting for 83 percent of ESG fund assets at the end of 2022 and seeing inflows of $40 billion during the fourth quarter. The US, which accounts for 11 percent of ESG fund assets, saw outflows of $6.2 billion during the final quarter of 2022. The 2022 outflows in the US followed a long stretch of positive growth for ESG funds.

Investors are increasingly focused on ESG issues in their investment strategies. Roughly 89 percent of investors considered ESG issues in some form as part of their investment approach in 2022, up from 84 percent in 2021, according to a Capital Group study.

If you would like to invest in ESG funds I recommend that you contact a Financial Planner to discover the options available for doing so on the Irish market.

Lisa Doherty, CFP® BBS QFA RPA SIA is a CERTIFIED FINANCIAL PLANNER™. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on lisad@jfl.ie

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