ESG — environmental, social and governance — is the business buzzword of the minute.

The Paris Agreement and climate crisis, and social issues such as fair wages and safe working conditions, have made many investors realise the power their money holds.

Now, growing numbers want to reap the benefits of investments and do something genuinely good — or, at least, stop contributing to society’s most pervasive problems.

What is ESG?

ESG, or environmental, social and governance, is a business term that covers actions like accountability, sustainability, diversity and equity.

In investing, it’s become a catch-all term for investments that have a broadly positive impact on the world around us.

ESG is a broad topic, which can cover everything from:

  • Sustainability and environmental concerns, like carbon emissions and air and water pollution
  • Human rights
  • Gender and race equality
  • Anti-slavery and better supply chains
  • Fair pay for workers
  • Health and safety
  • Investing back into communities

What is ESG Investing?

As the climate crisis intensifies, more people are looking to use their money for good and move away from supporting businesses that are harming the world and societies around us. ESG investing allows investors to support positive causes while still potentially growing their wealth for the future.

Research showed that  in 2020, investors put $51bn (£42bn) into sustainable funds, compared to $5bn (£4.15bn) just five years ago.

NS&I Green Savings Bond rate doubles

What is the Paris Agreement?

Do people want to invest responsibly?

An Invesco survey found that 90 per cent of under 45s want to make responsible investments.
Yet just 14 per cent say they understand the term ESG, leaving many conscientious investors confused about where to start.

Other investors put their impact before their profits, prioritising impact over returns.

What are the misconceptions?
Historically, some investors believed that ethical investments didn’t perform as well as investments based purely on financial performance.

Now, with ESG a mainstream consideration for all companies and fund managers, this is not the case.
Though past performance isn’t an indicator of future returns, ESG funds and other responsible investments now have the power to financially compete with non-impact investments will help reduce misconceptions.

Just wanting to invest responsibly isn’t enough these days and ESG investors want to truly know where their money goes.

Responsibly could simply be interpreted as above board, with clients happy to invest in oil, tobacco and weapons as long as it’s legal.
ESG investors want to avoid these morally questionable sectors and contribute to more positive causes.

They are pragmatic, though, and many prioritise the return on their investment above all — particularly if they do not have large amounts of money to invest in the first place.

Some will have specific motivations, such as investing in climate action or avoiding sectors like gambling that don’t align with personal or religious beliefs.

Questions to ask yourself if ESG is of interest:

  • How much do you know about ESG?
  • Do you want to avoid specific sectors or regions?
  • Are there specific businesses you don’t want to support?
  • Do you have religious or personal values that will affect how you invest?
  • Do you want to avoid companies that are indirectly involved in areas you disagree with, or just those directly in the sector/region?
  • Is there a specific area of ESG you’re most focused on, such as climate change, fair treatment of workers or gender equality?
  • Are there specific ESG reporting standards your investments must stick to?
  • Do you want your investments to have a specific, measurable impact as well as potentially generate returns e.g., help pay workers fair wages?