According to recent figures1, UK-based ESG funds saw record inflows between March and July this year. In July, £362m was invested.
Investing according to environmental, social and governance (ESG) principles has been a fast growth area, but you may be left wondering – what does it all mean? ESG refers to three factors used by investment companies to evaluate corporate behaviour. By assessing these factors, investment companies measure the ethical impact and sustainability of an investment.
- Environmental criteria – includes waste management, carbon emissions and air/water pollution
- Social criteria – includes data security, human rights and labour standards
- Governance – includes board diversity, executive remuneration and business ethics.
There used to be a perception with sustainable and ethical investing, that investors were prioritising principles over profit and that investing in this domain was generally considered to be higher risk compared with traditional counterparts. However today, with a wider choice of ESG products to invest in, this style of investing can generate sustainable long-term stable returns. Over the 12 month period to 1 July 2020, a study2 of 140 ethical unit trusts outlined that those in the ethical category achieved better levels of growth than their non-ethical counterparts, growing by just over 4% compared to a contraction of nearly 1.5% for investments not in the ethical category. Over a five-year time scale, ethical investments achieved just over 41% compared to nearly 32% for those not listed as ethical. Choosing investments based on ESG principles offers no guarantee of performance but, as part of a diversified portfolio, they can allow you to make a positive impact without having to forfeit the prospect of investment return.