ESG – environmental and social governance – is increasingly at the forefront of shareholders’ minds.
Sustainability is perceived as not only good for the planet but also for broadening the scope of diversification within portfolios.
Yet there is nothing new about it.
Indeed you can go right back to the 18th century when Quakers and others banned participation in the slave trade.
John Wesley (1703–1791), founder of Methodism, was an advocate. Wesley’s sermon “The Use of Money” outlined his basic tenets of social investing – not to harm your neighbour through your business practices and to avoid industries which damaged the health of workers.
Campaigners of the time, often religiously motivated, urged the avoidance of “sinful” companies, such as those associated with guns, liquor, and tobacco.
Today, the basic principles are the same, but approaches vary.
HSBC states: “Ethical investing tries to actively avoid companies or industries that might have a negative impact on society and the environment. This is called negative screening. Sectors such as tobacco, animal testing, gambling and oil and gas.
“ESG investing actively selects companies that meet specific environmental, social and governance requirements. It is less restrictive than ethical investing as it considers companies that are adapting, such as oil, that invest in clean energy.
“Impact investing actively selects companies whose positive impact on the world can be measured. For example, those who generate a specific amount of recycling or save a certain amount of water.”
Yet, when it comes down to it, most investors want some return for their money.
Hargreaves Lansdown notes: “Those who invest to make change in the world and expect no financial return are considered philanthropists. On the opposite end is a group that expects solely financial returns and is completely unbothered by the positive or negative impact of their chosen investments. But the majority of investors fall somewhere in the middle.”
Undoubtedly, ESG is having an effect, with car making, so central to West Midlands manufacturing, particularly under pressure.
“Risk has been hanging heavy over the auto industry for years,” said Hargreaves Lansdown. “It’s now coming home to roost for companies that haven’t started to pivot toward sustainable alternatives.”
Two businesses at different ends of this spectrum are Johnson Matthey and Tesla.
Hargreaves Lansdown goes on: “Johnson Matthey’s been a successful manufacturer of catalytic converters, the bits that strip out some of the harmful emissions from petrol cars, for years. But as concern for the impact these vehicles have on the environment grew, so did the environmental risk at Johnson Matthey.
“In July 2021 the UK announced a ban on the sale of new petrol vehicles by 2030, and the group’s share price has been in decline ever since.
“For those who saw Tesla’s ambition to churn out electric vehicles at scale as a smart move away from petrol, the stock offered enormous opportunity. In this instance, it paid off, despite coming with a multitude of other risks.”
However, you can’t rest on your laurels.
The financial services firm went on: “Notably, Tesla was recently excluded from the S&P 500’s ESG index. This comes as a blow given the carmaker’s position as an EV proponent. However, concerns about working conditions and a rise in the number of accidents mean the group’s overall rating has been dropping as peers improve their own environmental credentials.”
The major issue for a majority of ESG investors is that while they want to feel better about themselves for taking a stand, they still expect robust returns.
Investing sustainably is just as hard, maybe harder, than investing conventionally.
Yet some things don’t change – a balanced portfolio remains key.