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An introduction to ESG investing

As technology gives individual investors more transparency about where our money is going, it’s right that many of us want to ensure that we’re investing in assets, companies, and funds that match our values.

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Image of money growing alongside ethical actions

As technology gives individual investors more transparency about where our money is going, it’s right that many of us want to ensure that we’re investing in assets, companies, and funds that match our values.

Investors’ desire to invest in a more ethical way has made the investment management world sit up, take notice and create sustainable investment products that meet these needs. 

This means that whether you’re managing your own pension pot or simply want to invest some of your savings, you’ve got more choice than ever to grow your money responsibly.

How easy is ethical investing? 

Previously, ‘ethical’ investments were a niche area, seen as a ‘nice to have’ add-on to an investor’s portfolio, based on the idea that while investing in a more socially aware way was a good thing, it wasn’t a priority.

However, in recent years so-called ‘ESG’ investing has become mainstream, resulting in a greater choice of investment funds tailored to those who want their money to grow while benefiting wider society.

Large fund managers are speaking publicly about the behaviour they expect from the companies where their clients’ money is invested. 

For example, the chief executive of BlackRock, one of the world’s largest asset managers, writes a public letter to the bosses of publicly traded companies each year to lay out the behaviour that it expects from them.

What does ESG stand for?

Let’s start with the basics. Ethical investment can be interpreted in quite a loose way.

The umbrella term ESG emerged as a more specific way for investors to put their money in companies and funds that take notice of the environmental, social and corporate governance factors when doing business. 

Here are some of the questions that ESG investors can ask when researching whether a company or investment fund can describe itself as an ESG investment.

E is for Environmental

  • Does the firm take account of its carbon footprint?

  • Does it use renewable energy, including wind or solar?

  • What are its recycling or safe waste disposal practices?

  • Does it use or create green products, technology, or infrastructure?

S is for Social

How does the firm treat its employees?

  • Does the firm have a broader mission or social purpose?

  • Does it manage its supply chain sourcing to ensure workers are treated humanely? 

  • How does the firm treat its customers?

G is for Governance

  • How does the firm decide on remuneration, bonuses and perks for its senior managers?

  • Are pay incentives tied to longer-term business goals, rather than just earnings per share?

  • How diverse is the company’s board of directors and management teams?

  • How transparent is the firm when it communicates with its shareholders?

This is by no means an exhaustive list, but it gives a sense of what investors need to be thinking about when determining whether an investment can be described as an ESG or ethical choice. 

Choosing the right ESG investment

It’s important to be aware that the metrics that the wider investment industry uses to determine whether a firm can be described as an ESG investment can sometimes be quite subjective. 

This means it’s vital that you do your own research to work out whether an individual company or investment fund really matches your values. 

For more details on what you need to consider before making an investment, read our ‘Seven questions you must ask before you invest’ guide.

When examining investment funds to work out whether they meet the ESG criteria that are most important to you, it can be a good idea to check what where each fund invests its clients’ money.

You can use websites like Morningstar and Trustnet to find out a fund’s top ten holdings.

Once you’ve done this you can also check how much of its portfolio consists of social or environmental investments. 

Doing these two things should at least give you a basic idea of whether that fund fits your personal idea of an ethical investment.

This can be a bewildering and complex process, so do not be afraid to get professional regulated financial advice to help you make the right choice for your investment goals.

An specialist independent financial adviser (IFA) may be a good way to help you decide how best to meet both your financial and personal goals when it comes to picking sustainable, socially responsible investments.

Where to go for financial advice.

How do you want to invest?

Once you’ve developed a broad idea about where you want your money to go, you can approach the practicalities of ESG investing in the same way as you would any other kind investment.

Investing in a tax efficient way

Work out how you can make these investments in the most tax efficient way possible. One way of doing this is to place the money you’re looking to invest in a Stocks and Shares ISA.

By doing this you will not have to pay any tax on the return you make from any growth in the value of investments or any dividends you collect, as long as these investments are held within the ISA.

Full details on how a Stocks and Shares ISA works.

Are you an experienced, active investor?

If you’re confident in managing your own investments you might want to look at picking company stocks individually. To do this properly you’ll need to be sure that you can take the time necessary to regularly keep track of how your investments are performing, and make changes to your portfolio if needed.

Another option is buy into specialist ESG funds that spread your money across a selection of companies. This has the benefit of spreading your investment risk, while hopefully ensuring your money still ends up in areas that are acceptable to you.

Comparing investment accounts

Online and investment platforms

You may have heard of some of the big name brokers that offer online investment platforms. They include AJ Bell, Hargreaves Lansdown, IG and Interactive Investor. But these platforms are largely ‘execution-only’. 

This means that they allow you to set up an account to buy and sell investments like stocks, bonds and funds, but they don’t provide advice on how suitable these products are for your circumstances.

So, in recent years a new type of online investment management service has sprung up. These are designed to cater to younger, tech-savvy investors who want help to grow their money but cannot afford the fees of traditional IFAs. 

These include companies like Moneyfarm, MoneyBox, Nutmeg and OpenMoney

Increasingly, these platforms have also begun to respond to the demand from customers looking to put their money in more socially responsible investments. 

These services are mostly digital, so you access them via websites or smartphone apps. They typically blend investment management services with financial advice.

They mainly do this by asking investors questions about their appetite for financial risk alongside their sustainable investing goals and tailor a range of funds managed by in-house investment teams. 

Compare investment accounts to determine which platform is suitable for your needs.