Pictured: Ciarán Hughes, financial advisor at Ethico
To understand ESG investing, we must first understand the problems with traditional investing, writes Ciarán Hughes, financial advisor at Ethico. The ethical investment company was awarded the ESG Company Award (Startup) at the inaugural ESG Awards in July.
Traditional investment funds seek to maximise returns and reduce risk. This is good for investors, however, traditional fund managers do not factor in the harm that may be caused by the companies they invest in. Harm to the environment and climate, harm to people and communities, or even harm caused to the company itself. Traditional funds invest in fossil fuel companies, weapon manufacturers, and tobacco as well as other negative industries and companies. Incredibly, the vast majority of existing company pension funds in Ireland are still invested in funds that support these negative industries.
ESG investing is simple: Like a traditional fund, an ESG fund will still cover the fundamentals of risk and return and carry out all due diligence on its investments, however, an ESG fund manager will go further. This ESG process removes negative companies, includes more positive ones, and works with the rest in the middle to improve. This working framework can include collaboration on improving ESG goals, shareholder voting to sway board decisions or affect board placements, and the threat of divestment if corporate behaviour does not move towards improving ESG metrics over time. It is a tangible way to influence corporate behaviour in the real world.
There are no downsides to considering ESG investing. Charges and fees are largely the same as traditional funds. Also, evidence shows that there is no difference in rates of return when comparing traditional to ESG funds. In practical terms, switching is easy.
Why switching to ESG investing is important.
In a survey completed by Amundi in 2021, 4 out of 5 people said that it is important to them that their financial provider take account of ESG. This is just not happening at present. There is a huge disconnect between what employees want for their savings and what organisations, trustees, and administrators are actually providing. Genuine ESG options are very rarely available on company pension schemes, and even when ESG options are introduced, they are often watered down or greenwashed solutions with little or no education provided to the employees. Subsequently, members don’t fully understand their options and as such opt-in can be low.
Important steps an organisation can take is to make ESG funds the default investment strategy and to educate the membership on the benefits and positive impacts of their future savings. Aligning the organisations investment principals with company brand values will also align with your teams expectations of your organisation. This is also true of corporate investments. It is important to be aware of what your company is investing in and the harm that may be causing – especially if it could negatively affect your brand in the future.
We do have some catching up to do with other countries (EU/US) where ESG funds’ popularity have been growing exponentially and now make up 25% of all assets under management. Like most businesses, solutions are demand-led. As we’ve seen more individuals and companies in Ireland demand better ESG options, we have seen the product providers react to meet that need. Some providers are very genuine in their efforts and do provide excellent solutions from an ESG perspective. It is important to note however, that some other providers are not as thorough in their commitment to ESG and may put more effort into “greenwash” marketing than actually providing genuine solutions. Seeking out expert and impartial advice can help in this regard. Fundamentally, people know right from wrong and they know sustainable investment from greenwashing once they are given full transparency to the information and comparative tools.
There are significant regulatory changes coming down the track soon. For many companies, the scope 3 emissions generated in their pension and investment funds can be larger than any emissions created in their supply chains or even energy use. This large percentage of carbon footprint can be reduced significantly by switching to ESG funds with a low carbon output.
The broader landscape
There is approximately €134 billion in Irish pensions, 3 trillion pounds in UK pensions, and approx. $60 trillion in pension pots globally. This money largely sits passively invested for many decades until peoples retirement – often contributing to climate change and the status quo. The effective deployment of this capital has the capacity to create the change needed to significantly reduce climate change and deliver a sustainable future, while also securing positive retirement outcomes for those pension savers.
There is little point paying into a pension for your entire career if it is subsequently going to pay out onto a dead planet. What is the point of a guaranteed income for life if you cannot play with your grandkids in the garden? We are on the precipice of systematic environmental collapse. It is imperative that decision makers take decisive, effective, and immediate action.
Notes: The term ”ESG investing” in this article is used to broadly cover all aspects of ethical / sustainable / responsible investing.