Firstly, yes, this blog is called ‘the new normal’ and yes, I know you may be fed up of this phrase (believe me, I am too!), but dare I say it? Is ESG ‘the new normal’ when it comes to investing?
You may have seen some of our posts over this past year on ESG and sustainable investing.
We posted a 3 part series over the summer called ‘What is ESG? – An Introduction’, this was written by us to help our clients really understand what ESG is, and it’s a good thing we did… a recent study was undertaken in this industry and it was found that the majority of clients didn’t understand what ESG was, in fact it was found that people thought it stood for ‘ethically sourced goods’.
Google searches also show an increase of 216% in the term ‘ESG’ since 2018. This shows if people don’t know what it is, they want to learn.
Over the summer we wrote;
‘What does ESG stand for?
ESG stands for Environmental, Social and Governance
But what is it?
Investopedia definition for ESG is;
‘Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.’
ESG is more of a theme or a set of principles to follow rather than a single set principle.’
One Planet, One Society, One Economy
ESG is a set of principles throughout not just investing, but throughout the world.
Climate change is a factor within ESG principles, but why is it important to focus on climate change?
Well we are one planet. We are one society and one economy. Yes, I am aware that sounds very ‘tree hugger-ish’… but look at how issues caused by climate change can affect society and the economy.
You will have seen hurricanes, floods, the wildfires in California and Australia on the news over the past few years. These are all driven by global warming. Since 1980, the cost of weather related catastrophises has been over $4,200Billion.
Boris Johnson recently announced that the aim is for the UK to have no sales of new fossil fuel cars by 2030.
Climate change is not an abstract future concept anymore and ESG isn’t just the latest trend, it is a future state of being, it’s an input into the outcomes of the future and it’s about companies embracing opportunities and making changes now to invest in the future.
The concept of ‘ESG’ or ‘ethical’, ‘socially responsible’ isn’t new.
Over 30 years ago, in 1987, there was a study by the Brundtland Commission called ‘Our Common Future’ which said that;
‘Sustainable development meets the needs of the present without compromising the ability of future generations to meet their own needs, guaranteeing the balance between economic growth, care for the environment and social well-being’
ESG has been gaining momentum for a while now as climate change and other social issues presented themselves but then of course, the pandemic hit.
Many investors probably assumed that the ESG focus would fade however it was only strengthened, with people looking at how everybody working from home would reduce carbon emissions, international travel was halted which again contributed to the drop in carbon emissions and early on in the pandemic when companies had to send employees off to work at home or on furlough and their mental and physical wellbeing became a focus.
Sustainable investments were once few and far between and usually meant sacrificing returns in order to stand by your beliefs, but these days, you would be hard pressed to find a company or an investment that doesn’t have some form of ESG policy or statement. Of course some may just be doing this to ‘tick the boxes’ but some will be actively involved in ‘doing the right thing’.
ESG has momentum now, we no longer think you have to sacrifice returns either!
As we have said before, ESG is not a tangible ‘thing’ that you can see or hold, it is in fact a complex interconnected system of ideas and processes.
Think of it as a journey, rather than a destination.