ESG Unearthed: Investing with Impact

“The first rule of sustainability is to align with natural forces, or at least not try to defy them” ― Paul Hawken

3 min read

ESG Unearthed: Investing with Impact

“The first rule of sustainability is to align with natural forces, or at least not try to defy them” ― Paul Hawken

3 min read

Over time, trends emerge and evolve as investors seek to align their portfolios with their values and goals, or what they believe will make the most profit. One such trend that has taken centre stage in recent years is Environmental, Social, and Governance (ESG) investing. This approach considers a range of factors beyond traditional financial metrics when evaluating investments, which can have both positive and negative impacts on your portfolio.

Before you ask, we are not here to tell you ESG is the best thing since sliced bread. That decision is up to you in consultation with your Patterson Mills Financial Adviser. What you will discover reading this article is exactly what ESG means, the pros and cons, how to decide whether it fit can within your investment strategy and more. So, read on to find out if this trend is worth you following, or not.

What is ESG?

ESG, which stands for Environmental, Social, and Governance, represents a framework for evaluating companies based on their performance in areas such as environmental sustainability, social responsibility, and corporate governance (including how companies treat their employees). ESG investing is about seeking financial returns while supporting businesses that demonstrate ethical behavior and contribute positively to society and the planet.

This approach doesn’t just look at profit and loss statements; it also considers a company’s impact on the environment, its relationships with employees and communities, and its overall management practices. ESG investing is often seen as a way to promote long-term sustainability and responsible business conduct.

ESG investing is often paired with “SRI”, and you may have seen the term ESG-SRI. SRI stands for “Socially Responsible Investing”. It is an invesment strategy that focuses on generating financial returns whilst also considering the ESG factors associated with a company or an investment. SRI aims to align investments with one’s personal values and ethical beliefs by avoiding or supporting companies and industries based on their social and environmental practices, which is why ESG and SRI are often seen together.

The Advantages

Aligning Values and Investments: ESG investing provides a unique opportunity to align your investment choices with your personal values. If you’re passionate about issues like climate change, social equality, or corporate ethics, ESG investments can help you support causes you believe in whilst potentially earning returns.

Potential for Strong Financial Performance: Numerous studies suggest that companies with robust ESG practices tend to outperform their peers over the long term. Whilst past performance doesn’t guarantee future results, this correlation between ESG and financial performance is a promising sign for investors in this sector.

Reduced Risk: Companies with strong ESG practices are often better equipped to handle risks associated with environmental, social, and governance factors. By investing in these firms, you may reduce your exposure to potential financial setbacks.

The Disadvantages

Lack of Standardisation: ESG metrics and ratings can vary widely among different providers, leading to inconsistencies and confusion. This lack of standardisation can make it challenging for investors to compare ESG performance across companies accurately. Often, it can be so complex that investors just give up.

Limited Investment Universe: By focusing on ESG criteria, investors may exclude entire sectors or industries from their portfolios. This can result in missed opportunities if a company in an excluded sector is genuinely improving its ESG practices whilst providing enhanced investment returns.

Data Accuracy and Reliability: The quality of ESG data can vary, and companies may not always provide accurate information. Investors need to scrutinise data sources and the methodologies used by ESG rating agencies.

How to Determine if it is Right for You

Deciding whether ESG investing should be a part of your investment strategy depends on your financial goals, values, and risk tolerance.

Here are some steps to help you determine if ESG investing aligns with your investment objectives:

Assess Your Values and Priorities:
- Consider what social and environmental issues matter most to you. ESG investing allows you to support causes you believe in, such as climate change mitigation, social cohesion, or corporate responsibility.
Define Your Financial Goals:
- Determine your short-term and long-term financial objectives. ESG investments should align with your goals, whether it’s retirement planning, buying a home, or funding education.
Risk Tolerance:
- Assess your risk tolerance. ESG investments, like any other investments, carry risks. Understand that returns can vary, and it’s essential to be comfortable with the level of risk associated with your chosen ESG investments.
Research and Education:
- Educate yourself about ESG investing. Learn the basics of how it works, the different approaches (e.g., exclusionary screening, positive screening, thematic investing), and the impact you can make through your investments.
Consult with a Financial Adviser:
- Consider seeking advice from a Financial Adviser with knowledge about ESG investing. They can help you understand how ESG aligns with your financial objectives and risk tolerance.
Review Investment Options:
- Explore ESG investment options such as ESG-focused mutual funds, exchange-traded funds (ETFs), or individual stocks of companies that meet your ESG criteria.
Performance Expectations:
- Understand that ESG investments may perform differently from traditional investments. Review historical performance data, but remember that past performance does not guarantee future results.
Diversification:
- Diversify your investment portfolio to spread risk. ESG investments can be a part of a diversified strategy that includes different asset classes.
Monitor and Adjust:
- Regularly review your ESG investments to ensure they continue to align with your values and financial goals. Make adjustments if needed.
Stay Informed:
- Stay informed about changes in ESG practices, standards, and regulations, as these can impact your investments.

The Costs

Like any investment strategy, ESG investing comes with costs. These costs may include management fees associated with ESG funds, expenses for ESG research, and potential trading costs. It’s essential to review these fees carefully to ensure they align with your overall financial plan as you can sometimes be faced with higher costs than other more common methods of investing due to the enhanced screening that takes place to ensure your funds do meet ESG criteria.

Understanding "Greenwashing"

Greenwashing is a deceptive marketing practice used by some companies to make themselves appear more environmentally friendly or socially responsible than they truly are. It involves exaggerating or misrepresenting a company’s ESG efforts to attract socially conscious investors. To navigate the world of ESG investments effectively, it’s crucial to be vigilant and conduct thorough research to distinguish genuine ESG leaders from companies engaging in greenwashing.

To Add ESG or Not to Add ESG, That is the Question

ESG investing is a dynamic and evolving approach that allows investors to align their portfolios with their values and support businesses that prioritise sustainability and ethical practices. However, it’s essential to be aware of the advantages and disadvantages of ESG investing and to conduct thorough research before making investment decisions. By considering your values, financial goals, and consulting with a qualified Patterson Mills Financial Adviser, you can create an ESG investment strategy that reflects your principles and aspirations for a more sustainable and responsible financial future.

What are you waiting for? Get in touch with us today and book your initial, no-cost and no-obligation meeting. Just send us an e-mail to info@pattersonmills.ch or call us direct at +41 21 801 36 84 to ensure your money is only going to investments that align with your values.

Please note that all information within this article has been prepared for informational purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Sustainable Investing: the What, the How, the Why

Sustainability is no longer about doing less harm. It’s about doing more good

Jochen Zeitz, President and CEO of Harley-Davidson Tweet

5 min read

Many people have heard of ESG-SRI, including sustainable and impact investing. These words may seemingly appear around every corner, in every questionnaire and are growing in popularity. So, what exactly is it all about?

The What

It is important to first understand what these terms actually mean:

“ESG” stands for Environmental, Social and Governance
“SRI” stands for Sustainable (or Socially) Responsible Investing
“Impact investing” seeks to make a positive impact on the World, as well as using ESG and SRI principles at all times

ESG integration as an investment tool is very different from sustainable investing. While some ESG factors do describe aspects of company sustainability, its aim is to unlock factors that solely impact financial performance. For example, an excellent ESG integrated strategy may still invest in sectors that could be considered unsustainable – like tobacco manufacturers or fossil fuel extractors.

A potential issue, and definitely something to look out for, is ‘greenwashing’. This is where a company is making false claims about a product that purports to be environmentally conscious but is not actually making any notable efforts for sustainability at all. To avoid this, seek companies that display their sustainability ‘credentials’ in a clear and easy to understand manner, with no misleading messaging or imagery, backed up by data and compared to a suitable benchmark.

The How

ESG investing has three criteria:

Environmental impact
Social impact
Governance

The environmental aspect looks at how a company impacts the planet by asking what a company does to reduce its harmful environmental footprint, utilise renewable resources and energy, and how it incentivises its employees to reduce their own footprint.

The social aspect questions how a company treats its employees, customers, suppliers, and the local community. This will analyse healthcare policies, compensation, employee working conditions, discrimination and more.

Governance relates to information about a company’s board of directors, business ethics and structure. Specifically, voting practices, independence, diversity, how new members are selected, how the company trades, levels of transparency, and so on.

Impact Investing seeks to make a positive impact by investing in companies whose products and services create positive impacts rather than just avoiding a negative impact. Impact investing also adds another element: the ability to measure the (global) effect of the investment.

This usually means that Impact Investors are more focused on creating a measurable impact on the World, even if it means foregoing a larger financial return possible elsewhere. It should be noted however that a lower financial return is far from being the norm nowadays from an Impact portfolio.

A lesser-known facet of ESG investing is to look for companies that are B-Lab certified as a B-Corp. B Lab creates standards, policies, tools, and programs that shift the behaviour, culture, and structural underpinnings of capitalism. Discover more about B-Lab’s work as a non-profit here.

The Why

There are clear reasons for the rise of ESG investing. Volatility in this sector has seen a great decline for investors over the last 5 or 6 years and it is now possible to obtain enhanced returns with reduced volatility risk in some cases. This is making ESG investments highly attractive as this sector develops further.

In addition, consumers and investors are holding companies accountable for their impact on environmental, social and governance factors against relevant benchmarks. This leads to the decision that a more ESG oriented company may deserve your money over a less ESG oriented company.

A record $649 billion poured into ESG-focused funds worldwide up to 30^th November 2021. This was up from $542 billion in 2020 and $285 billion in 2019, making a 127% annual increase over just two years! In December 2021, Morningstar Direct estimated that global sustainable fund assets reached $2.7 trillion.

Sustainably Investing for the Future

ESG and Impact Investing should not be only for a select few. At Patterson-Mills, we believe in investing for a better future and making it accessible for all. To accomplish this, we offer tailored solutions from a carefully selective range of funds, fund managers, with rigorous analysis of appropriate criteria. Following an initial no-obligation meeting, we create a bespoke recommendation for our clients so as to successfully achieve their investment objectives.

Whether our clients wish to invest 100% of their available capital into ESG, SRI and Impact Investing fund styles, or maybe 25%, or perhaps initially none at all, we have a suitable offering available. However, the key is to be put into a position to make a fully informed choice, which at Patterson-Mills, we show all prospective clients.

Our interests and those of our clients are one and the same, and so we only use proven, cost-effective, and tailored solutions in order to produce the most positive outcomes for our clients’ financial objectives.

Get in touch today and book your free no-obligation review meeting. You have nothing to lose and potentially lots to gain!

Send us an e-mail to edward@pattersonmills.ch, call us direct at +41 78 214 84 32, or fill in our contact form below.