ESG Factors – What Do They Mean For The Bottom line?
Well, it’s official! The Duke and Duchess of Sussex have become partners at an ethical investment firm – so ESG factors, as we predicted, have literally reached for the stars. And with good reason! There have been hundreds of articles since the pandemic began about people’s changing attitudes to work. As a result, few can have missed the message that Millennials and Gen Z’s want different things from work. Flexibility and remote working top the lists, coming second only to the desire to work for a company that shares their ethical values and which value purpose as much as profit.
So, it was only a matter of time before we began hearing more from companies about their environmental, social and governance (ESG) credentials. But, what does that really mean? What do ESG factors really entail? And can they possibly matter as much as profits? After all, you cannot pay your employees without profit: you cannot re-invest in the business and pay dividends to your shareholders.
ESG – A Close-Up
Concerns around ESG factors are nothing new in themselves. The origins can be traced back as far as the 1800s. Religious groups, like the Quakers and Methodists, ran their businesses according to socially responsible principles. They even established socially responsible investment guidelines for their followers.
More recently – harking back to just 2006 – the United Nations launched a set of six investment principles. And, it was arguably these that started the incorporation of ESG into mainstream investment practice. In short, ESG criteria judge:
1) How a company meets its environmental obligations
2) How it manages relationships with employees, suppliers, customers and the local community
3) The principles, composition and behaviour of the leadership team.
Similarly, ESG investing looks to invest in companies that can evidence those values. This brings us full circle to the generations mentioned above. Millennials and their successors not only want to work for companies that share their values, but they also want to invest in them as well. Often they want to go one step further and make investments that have a positive and measurable social and economic impact.
ESG And The Current State of Play
“Impact investing,” as it has been dubbed, is now the fastest-growing area of responsible investment. The World Economic Forum estimated that $1tn (£730bn) of assets were committed to impact investing in 2020 alone, with the sector forecast to grow at $250bn (£183bn) annually.
It is no surprise then, that companies are increasingly concerned about meeting their ESG obligations. Naturally, the bottom line remains important, but now both investors and employees are using other criteria to judge companies. So, we will be hearing a great deal more about ESG and ethical investing for the foreseeable future!
At Lewis Brownlee Financial Services, we are proud of our responsible investment portfolios. So, if this is something that interests you, please do give us a call on 01243 767 469, or email us from our contact page. We’d be happy to talk you through!
Written by Steve Burns
Steve is a chartered financial planner who has been with Lewis Brownlee for over 20 years, who now heads up Lewis Brownlee Financial Services. Under his directorship, the firm has established itself as a specialist provider of professional, informed and impartial advice.