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Understanding Sustainable Finance and ESG Investing

Environmental, social and corporate governance (ESG) investing, socially responsible investing and impact investing are terms that fall under sustainable finance but can sometimes overlap and may involve different approaches to investments.

Socially responsible investing involves considering the social impact, specific ethical criteria, or moral values of an investment as well as the expected financial return. Although this method may consider ESG factors, it goes a step further by seeking out or eliminating investments based solely on a specific ethical consideration.

Impact investments aim to help an organisation or business generate a positive and measurable social or environmental impact in addition to receiving a financial return. This type of investing provides capital to address challenges in sustainability.

ESG investing focuses on companies making an active effort to either limit their negative societal impact and/or deliver benefits to society. It is an increasing trend to use ESG factors to steer investment decisions. Key ESG factors fall under these categories:

  1. Environmental - Conservation of the natural world
  2. Social - Conservation of people and relationships
  3. Governance - Standards for running a company

Like all investments, it is important that you understand what you are investing in. Be mindful that ESG criteria for one investment may differ from another. You can find more information about how an investment incorporates ESG and how it weighs ESG factors in its disclosure documents. You should read all disclosures carefully to make sure you understand the investment and how its ESG orientation may affect its risk. Potential ESG factors to consider include:

Environmental Social Governance
Climate change and carbon emissionsCustomer satisfactionBoard composition
Air and water pollutionData protection and privacyAudit committee structure
BiodiversityGender and diversityBribery and corruption
DeforestationEmployee engagementExecutive compensation
Energy efficiencyCommunity relationsLobbying
Waste managementHuman rightsPolitical contributions
Water scarcityLabour standardsWhistle-blower schemes

It is always important to understand whether an investment’s stated ESG approach matches your investment goals, objectives, risk tolerance, and preferences. So be sure to choose an approach that is right for you. Here are some things to consider:

  • Some investments focus on ESG investing while others consider ESG factors alongside other factors.
  • Different funds may weigh ESG factors differently.
  • Some funds that don’t have “ESG” in the name may still incorporate elements of ESG investing into their portfolios.
  • There is a lack of regulation and no consistent or standard approach amongst ESG rating agencies. This produces varied ratings in the market for the same investment.
  • Consider what is important to you and match your investments to such values and priorities e.g., low carbon footprint, or diversity, equality and inclusion policies.
  • Conduct proper due diligence on potential investments. Greenwashing is now a growing phenomenon - where funds are being misrepresented as providing ESG targets or firms exaggerate the environmental, social or governance benefits of a particular investment.