COP26 is well underway… let’s examine a popular type of responsible investing.
Right now, global delegates are taking part in the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow. The aim is to unite the world to tackle climate change, working towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change.1
After a year where crisis after crisis has made the headlines, from floods4 to fires5 and searing temperatures in Europe6 , could this be the time when our climate finally comes into full political focus?
We hope so, and investors certainly seem responsive. A recent survey found there has been a rapid increase in appetite for incorporating environmental, social and governance (ESG) factors to drive returns.7 In fact, ESG has become something of a buzz word, but what does it actually mean?
Taking an ESG approach is commonly described as meaning a company’s operations are measured against a set of standards that responsibly minded investors can use to screen potential investments. This might include areas to avoid (that might cause harm) and areas to support (that actively benefit people and planet) – which is known as positive screening.
However, it is important to note that investing with ESG values can be considered a relatively low level of responsible investing (when compared for example with impact-driven investing). It can be used to select ‘best-in-class’ investments; for example selecting one oil and gas company over another because it is comparatively greener.
At Holden & Partners, we have some concerns that whilst an ESG approach can be a helpful starting point, it can also be used for ‘greenwashing’ of investors. The use of a ‘best-in-class’ approach shows this, but also the ESG input can be as minimal as looking at ESG scores. For example, a capital-light business (one without high levels of capital investment, or with a collective approach, such as Uber8) may score highly on ESG metrics without actually having positive ESG stewardship.
ESG investing principles are examined across three areas: environmental, social and governance. To mark COP26, we will be focusing on each part of ESG, to really bring the spotlight to this increasingly popular investment approach.
Let’s start with ‘E’ for environmental
The environmental aspect of ESG focuses on how a company performs in relation to our planet. Are they a good steward of our natural world? Do they seek to restore and enhance or just avoid harm?
Avoiding harm is vital, but it is only the first step. Anyone who watched the recent Earthshot Prize will have seen the inspiring and ever-growing range of options for improving our environment, as well as reversing harm that has already been caused. An ESG approach rarely creates the level of change or transformation that more sustainable investments can result in. For example, a tobacco company might score well at an environmental level because the packaging is recycled, but depending on investor values, this might not make it a positive company to support.
As long-standing investors in sustainable solutions, we know first-hand the huge variety of projects around the world where a positive difference can be made with investment. We’re always looking for new and exciting options, many of which go beyond ESG requirements.
Some relevant questions to assess environmental factors include:
- What is this company doing to prevent climate change?
- Do they seek to improve or just avoid harm?
- How do they manage potential environmental risks?
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Please note that any thresholds, allowances, percentage rates and tax legislation stated may change in the future. The content of this communication is for your general information and use only; it is not intended to address your particular requirements. This communication should not be deemed to be, or constitute, advice. You should not take any action without having spoken with your usual adviser.