Where once an investor’s primary question was purely focused on which stock would deliver the best returns, today, an increasing number are taking a more nuanced approach.
Driven by their own personal views on what is right and wrong, socially responsible investing is becoming increasingly popular. And it’s not hard to see why.
From wanting to back a company with a sound approach to tackling the environmental challenges we all face, to those who treat their staff, globally, with respect and fair pay, it’s a case of feeling good about your investment.
The three key criteria being used are environment, social and governance – which gives rise to the term ESG investing.
Sat beneath the environmental umbrella are the company’s green credentials; social how it handles relationships with the communities in which it is based, those it employs and its customers; while governance covers the ideals and actions of its leadership team and way it handles its shareholders.
With the steady rise of equity crowdfunding being used as a means of raising capital in recent years, this question is no longer being addressed by just a small number of hedge funds and investment banks, but rather by entire communities of socially-conscious individuals.
The opportunity to get in on the ground-floor of firms with sound ESG credentials has become an extremely compelling one for many.
There are key factors, however, that investors need to be alert to.
ESG investments today may prove very different tomorrow as trends and discoveries dictate a pace of change.
For example, producers of asbestos would, in a previous era, have no doubt been seen as ticking the ESG boxes; a ‘miracle’ building material which was fire retardant. Viewed through modern eyes, with what we know now of the health risks, any significant investment would have seemed foolhardy in the long-term.
One of the factors that can be attributed strongly to the rise of modern ESG investing is the Covid-19 pandemic. The huge levels of uncertainty in 2020 led many investors down the path of socially responsible investing.
After seeing many of their traditionally stable investments in sectors such as hospitality and transportation rocked by the market disruption, investors looked to ESG investments for stability and long-term growth. As with many investments, patience is a virtue when it comes to ESG investments.
Yet the biggest move towards ESG investing has been a changing focus towards industries and our expectations in pursuit of profit.
We are more aware than ever of certain practices once commonplace and now frowned upon.
An example of one such factor is the ever-increasing globalization of supply chains and the complexities surrounding them, which have gained a much wider awareness over the past couple of decades.
No longer can a consumer claim to be unaware of ‘sweatshop’ labour in Third World countries that went into the high-profit margin clothing of some of the biggest brands.
The result has been a renewed awareness from companies of not just the public image they project, but the reality of their working practices. In an era of social media and wall-to-wall news coverage, negative news travels fast and all are only too alert to the perils of any unscrupulous activity being exposed.
But, as with all investments, those pondering in which companies and sectors invest in, need to do their due diligence; monitor the trends, look at the company’s history and try and double-guess the market.
IMPORTANT NOTICE
Investors should recognize and accept the risks associated with investing.
Certain investments may require you to keep your holding for periods of many years with limited or no ability to resell unless there is a strongly regulated secondary market.
You may also have limited access to periodic reporting, see your holdings decrease and increase in value, or even lose your entire investment.
Investors should decide for themselves whether to make any investment, basing this on their own independent evaluation after consulting with financial, tax and investment advisors.