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22nd
Sep
2020

Understanding ESG?

Duncan Glassey

Environmental, Social and Governance (ESG) investing is now a major disruptive force.

Businesses are increasingly incorporating ESG considerations into everyday practice, savers are increasingly expecting people and the planet to be considered as part of investing, and financial regulators are on the prowl to make sure that environmental and social factors are scrutinised and disclosed.

So with so much talk of ESG factors, what does it all mean?

ESG refers to the Environmental, Social and Governance characteristics of a company or business. These facets of the business contribute to the risks and opportunities it is exposed to now and in future.

Environmental refers to a company’s dependency and impact on ‘natural capital’, the stock of renewable and non-renewable natural resources. This includes how the business impacts (or is impacted by) climate change, what natural resources it produces or uses and whether it contributes to pollution or waste.

Social factors include how the company affects customers, looks after its employees, deals with suppliers, and interacts with the communities in which it operates.

Governance (or corporate governance) is the process by which a company is managed and overseen and includes factors like board structure, to create proper accountability, and management remuneration to create alignment of interest with shareholders.

It is important to note, however, that ESG integration does not prohibit any specific investments as long as material ESG risks are identified and taken into account as part of the investment decision.

Responsible investment is not just about investing in the ‘right’ companies, it is also about investing in companies that require improvement and engaging with them to help them get there. If successful, such engagement should benefit both wider society and the value of the investment.

Exclusions – Also referred to as negative screening and the predominant approach of many ethical funds. Exclusions prohibit certain investments from a firm, fund or portfolio. Exclusions may be applied on a variety of issues, including to align with client expectations.

Sustainability Focus – Defined as: “Investment approaches that select and include investments on the basis of their fulfilling certain sustainability criteria and/or delivering on specific and measurable sustainability outcome(s). Investments are chosen on the basis of their economic activities (what they produce/what services they deliver) and on their business conduct (how they deliver their products and services).”

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

Greenwashing is a form of marketing spin, in which a false impression is given, or misleading statements are made, to persuade the public that an organisation’s products, aims or policies are more environmentally friendly than they actually are.

Finally, on the domestic front, regulators will soon require financial planning firms to ask clients about their views towards ESG funds, which we hope will lead to the increased focus on the quality of ESG products available to UK investors.  Watch this space.

Duncan R Glassey
Managing Director – WealthFlow
[email protected]

 

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.

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© 2020 WealthFlow Group Limited
All Rights Reserved | Privacy | Cookies Policy

Registered in Scotland No SC635011. Registered Office: 15 Atholl Crescent, Edinburgh EH3 8HA.

Authorised and regulated by the Financial Conduct Authority
For your protection, unresolved complaints can be referred to the Financial Ombudsman Service