Esg investing, or economic, social and governance investing, puts a great focus on ethical and eco-friendly companies, but how important is it in an investment portfolio as a whole?
These type of investments may suit those wanting to invest their money not just to get returns but to help fuel change in the world. However, ESG has a connotative idea attached to it: that they don’t do as well as traditional investments.
Managing director of Woodward Financials, David Woodward shares why ESG investing is vital to a modern, well-balanced portfolio.
“In the 80s, we knew about global warming. Here we are four decades later at the precipice, with less than 100 days to go until the COP26 summit in Glasgow.
“Will the decisive decisions to stave off disaster be made?” he asked.
The modern world is facing more turbulence than it has seen in recent history and many businesses are making the policy changes needed to impact this.
Mr Woodward stressed the fact that countries need to be united and take accountability to keep these issues at bay, but this approach is not all that likely.
“Or will they kick the tin can down the road once or twice more until the road floods like the Holy Island causeway before turning their attentions to looking for Planet B without further ado?”
Mr Woodward continued: “In 2020, the world watched in amazement during lockdown how quickly nature flourished, and rivers started to spring back into life.
“Some, but not all, realised the damage us humans had inflicted on our already fragile home, Earth.
“The evidence of change has been slow at best and nowhere near the uptake required, with only £33billion held within the top 10 climate funds.
“This must be a sector to keep an eye on and therefore ESG investing, and climate funds need to be considered as a potential investment in the coming years.”
Mr Woodward explained: “As the momentum will surely start to build, especially when it will take trillions to decarbonise the global system over the next 20 years.
“Investors are increasingly looking to make a positive contribution to society and the environment through their personal finances, driving us towards a cleaner, healthier, and more equitable future.”
One of the main reasons that ESG has not pulled through in past years was the general assumption that eco-friendly investments meant less returns and more risk.
Mr Woodward argues that this has since their first appearance in the market, ESGs have become more popular not purely for the returns but rather what these businesses stand for, and returns have steadily risen alongside this trend.
However, the full effects of the pandemic on consumer saving and spending is also soon to be felt by the majority of people, so is this the best time to be investing in an ESG or traditional markets?
“We are at a stage when we’re about to feel the full impact of the pandemic, with inflation on its way as the cost of critical foods and metals start going up.
“A rapidly declining growth rate in the workforce, with a global economy at an inflexion point to turn down in the long term, negative growth rates are likely not to mention looming tax rises in the coming years which could be as high as six to seven percent added to our marginal rates
“Low growth shares in emerging markets are likely to do well.
“Shares that benefit from the greening of the economy will do much better, for example, renewable energy and electrification of the global infrastructure system to cope with the demand for electric cars.
“These green companies are likely to have top line revenues that dwarf the declining growth rate of the rest of the world economy and for this reason, we have a model portfolio specifically for those interested in ESG investing,” he concluded.