What is ESG investing and is it here to stay?
ESG investing has started to make waves around the investing community. As the world starts to focus more upon climate change and socially acceptable practices, heads are turning towards the investing world.
We can see pension management come under scrutiny for how they invest. I know personally that the local government in the UK has come under scrutiny and even have had protests about the local government pensions being invested into oil stocks.
What is ESG investing?
ESG stands for Environmental, Social and Governance. ESG investing is otherly known as sustainable investing. This type of investing is an umbrella term for investments which seek positive returns (like all investing) but also have long-term positive effects on society, environment and how they perform as a business, this can come down to how management acts.
There are many categories of sustainable investing, these include:
Impact investing, socially responsible investing (SRI), ESG and value-based investing.
SRI is about investing ethically which can include ESG and also impact investing.
How can a company be rated in terms of ESG score?
The European federation of financial analysts societies (EFFAS) has defined 9 topic areas for when reporting on ESG issues to analyse.
GHG emissions (greenhouse gasses)
Training and qualifications
Maturity of workforce
Revenue from new products
MSCI uses a scale to rate companies according to their ESG score. The grades go from CCC to AAA. CCC & B are considered laggard and need to improve their practices. BB to A grade is considered average compared to industrial peers. We then have AA to AAA grades which are the leaders.
According to MSCI the top 5 companies to their ratings are
- Nvidia ticker NVDA
- Pool ticker POOL
- West pharmaceutical service ticker WST
- Vertex Pharmaceuticals ticker VRTX
- Adobe ticker ADBE
Here find a list of their top 50 stocks for sustainable investing:
With Sustainable & ESG investing becoming so popular among investors there is a new wave of ETFs hitting the market.
Vanguard has recently offered ESG ETFs.
For example they launched Vanguard ESG Global All Cap UCITS ETF which tracks the performance of the FTSE Global All Cap Choice Index. This index tracks 7,500 companies but excludes more than 1,400 as they don’t meet the ESG requirements/standards.
Alongside this ETF they offer a few others for diversity which I shall list below.
Ishares also offers many ETFs for ESG investing which also give you exposure around the world.
Ishares MSCI Europe ESG screened – Ticker SAEU – Ongoing charge 0.12%
Ishares MSCI World ESG Screened – Ticker SAWD – Ongoing charge 0.20%
Ishares MSCI USA ESG Screened – Ticker SASU – Ongoing charge 0.07%
Ishares MSCI Japan ESG Screened – Ticker SAJP – Ongoing charge 0.15%
Ishares MSCI EM IMI ESG Screened – Ticker SAEM – Ongoing charge 0.18%
With many of these ETFs you will find many sectors may be missing. This is down to the ETF/Fund itself so if investing into these funds you should know if they also align with your goals or beliefs. Just like we have Shariah investing if you practice Islam or want to invest that style or on the other hand investing into VICE Funds its good to know what you are investing into.
Some of the sectors which may be excluded are UN Global Compact, Controversial weapons, conventional weapons, nuclear energy, oil & coal producers, thermal coal, alcohol, tobacco, gambling, pornography and genetically modified organisms (GMO). The MSCI SRI index excludes all of these but you may find other funds are more lax.
SRI indices compared can be found here https://www.justetf.com/uk/how-to/invest-in-social-responsibility-europe.html
Is ESG/sustainable investing here to stay?
In 2020 the US SIF foundation identifies 836 registered investment companies with ESG assets. Out of the 836 investment companies 718 were mutual funds and 94 ETFS. Its been totalled that the assets registered under the companies totalled $3.10 trillion which is up 19% from 2018 ($2.61 trillion).
Some people call this ESG a fad, maybe just a buzzword to get investors excited and new money flowing. Some have even called it a bubble.
Even with people calling ESG investing a fad we cannot deny that these types of funds, especially in the current climate have found a current soft spot in our society.
Do you think ESG investing is here to stay or a fad?