It’s true. ESG investing does make a difference

The evidence is out there that being a responsible investor can have a significant impact and help create a better world.

Lessons from the pandemic

Every year, Earth Overshoot Day marks the date our unrelenting demand for resources exceeds what this planet is capable of generating. 

And every year it’s been creeping further forward in the calendar. Until 2020 that is.

Amid the tragedy of the pandemic, one small positive was that a lack of travel and global business slowing down cut our collective carbon footprint. This one factor was enough to push back the overshoot date by three weeks from the previous year – to 22 August.

Sadly, the effect was only temporary. Economies reopened, travel increased, and things started to go back to somewhere near normal. This year, the overshoot date was back to 29 July. 

It’s particularly disappointing considering the recent warnings from the UN secretary general that we’re facing a ‘code red for humanity’. But I like to think this episode actually provides a kernel of hope on what’s possible for us to achieve as investors.

Busting another myth on ESG

In a previous blog post, I looked at the misconception that responsible investing means choosing between performance and principles. 

But there’s an even more pervasive myth – the belief that considering environmental, social and governance (ESG) factors doesn’t make a difference. 

We’ve already seen from what happened in the pandemic, what can happen when we all change our behaviour together. Staying at home, not getting in our cars, avoiding air travel, all had an immediate effect on the carbon footprint.

Investors can have a similar influence too, through where they choose to put their money and exercising their right to vote on shareholder issues. 

Look at oil and gas companies. In the last two years, companies including Shell and BP have made tougher commitments to cut greenhouse gas emissions, in part as a result of pressure from their shareholders. Exxon Mobil now has two activist investors on its board, who have the aim to push the company towards cleaner forms of energy production – and away from fossil fuels.

And let’s remember when looking at ESG, it’s not just about the environment. Fast-fashion brand Boohoo came under fire last year for poor working conditions in its supply chain. The outcry included its third-largest independent shareholder selling almost all its holdings and other investors re-evaluating their investments. Since then, Boohoo has severed ties with hundreds of manufacturers and won’t allow subcontracting by its main suppliers. The voice of the shareholder can be a powerful voice for good.

Taking stock of your ESG impact

So where does that leave you as an investor? How do you know whether your financial decisions are leading to change? 

The investment world is getting better at measuring ESG. That means scoring whether companies are walking the walk, and not just paying lip service to becoming more sustainable. 

And we’re also finding better ways to measure how where you choose to put your money is having influence. According to EQ Investors, for example, investing £20,000 in one of its portfolios could avoid up to 6.9 tonnes of CO2­emissions, provide up to 4.7 million litres of clean water and generate as much as 3MWh of renewable energy.

How to do it

And the good news for investors is there are many ways of making a difference.

There’s impact investing, investments driven by making a positive difference along a specific theme; positive screening, inclusion-based investing, which targets companies exceeding certain ESG criteria; negative screening,  where you can avoid companies that don’t meet certain criteria, or are involved in certain industries such as making weapons or burning fossil fuels; and integration, which involves Incorporating analysis of financially relevant ESG factors into investment decisions, financial modelling, and portfolio construction. 

We make use all of these at Betterworld Financial Planning, helping provide you with model portfolios from a variety of investment managers, who all have their own criteria for assessing sustainable investments. Speak to us about which approach will best fit your own values.