WOMBLE Bond Dickinson wealth adviser Adam Carmichael says it is no surprise there has been a rapid rise in ESG investing. So what are the key facts you need to know?

Environmental, Social, and Governance (ESG) is a movement that is growing rapidly, and one which now impacts on virtually every sector.

It refers to the long-term sustainability (and success) of an organisation; an attitude towards the environment, society, and decision-making. In short, the organisation will do well, by doing good.

Womble Bond Dickinson understands the complexities behind ESG, and the industry policies which also underpin the market standard for what ‘good’ looks like.

The vast array of issues that fall under the ESG umbrella range from climate change and protection of natural resources to equality, diversity and inclusion, safeguarding, modern slavery; data protection, executive compensation, risk management and operational hygiene factors.

There are many issues facing our society which have become hot topics under the spotlight of media attention. With the COP26 summit just around the corner, everyone is talking about climate change. And by taking the knee, the England men’s and women’s football teams continue to direct the conversation towards discrimination and equality. It is perhaps no surprise that against this backdrop we have seen a rapid rise in ESG investing.

ESG funds are those which not only look to make profit for their customers, but also aim to invest in shares and bonds of companies and organisations which meet certain environmental (E), social (S) and governance (G) criteria. When identifying suitable investments, in addition to analysing potential returns, ESG fund managers will be asking questions like ‘what impact does the company have on the environment?’, ‘how does the organisation strive towards LGBTQ+ equality and racial diversity in its workforce?’ and ‘how do they treat their staff?’.

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Although socially responsible investing has been around for decades, there has been a surge in the number of ESG funds available to investors in the last five years. There has been a long held view that ESG investing and maximising returns were mutually exclusive. Historically, the cost of such funds were much higher than their mainstream counterparts, which acted as a drag on performance. Heightened interest in the sector has led to greater fund choice, and this increased competition has driven down prices.

There are now ESG funds available which compete with their mainstream equivalents in terms of charges and performance. With these potential deterrents to ESG investment now seeming less of an issue, it is likely that the popularity of these funds will keep growing. It will be interesting to see if the fund managers can cope with the continuing influx of new cash whilst still adhering to their selective investment criteria.

If you are interested in ESG investing within your portfolio there are lots of important considerations to bear in mind. For example, the restrictions placed on ESG fund managers when investing can not only affect the diversification within the fund, but also lead to significant replication of underlying holdings across ethical portfolios.

Although there are an increasing number of equity based ESG funds available to investors, and now some ESG bond funds beginning to emerge in the marketplace, it is often difficult to gain exposure to certain asset classes like property, cash and alternatives without veering from the ethical investment mandate. It is also notable that as companies around the world strive to become increasingly sustainable themselves to satisfy their customers, mainstream investment funds should naturally become more aligned with ESG criteria as a result.



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