Why ESG investing is a good alternative, and how your portfolio can literally clean up


Why ESG investing is a good alternative, and how your portfolio can literally clean up

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4 minute read

Will the world be a better or a worse place when the Coronavirus is finally over?

Or will you revert to normal life?

Those are the three alternatives you face. Better, the same, worse.

The news, though, has a negative bias. Fear gets your attention. And fear is a deep-rooted psychological evolutionary trait to help keep you alive. Fear can lead to loss of hope and helplessness.

It can also increase anxiety levels and provoke irrational behaviour. Coronavirus, after all, led to the stockpiling of toilet rolls and bottled water.

Making a difference

Can you make a difference in a world of over seven billion people?

The challenges are overwhelming.

This blog explains how you can make a positive difference without leaving your home. You don’t need to buy a megaphone, go on a march or wave a banner. There are no membership forms or monthly subscriptions.

A few simple steps, taken calmly and slowly, can lead to real results and positive outcomes.

It comes down to the way you invest and save your money.

Welcome to the positive world

Climate change, habitat destruction, ocean plastic, child workers and income polarity are global challenges.

Your attention may have been caught by campaigners, such as Greta Thunberg.

The human race is doing a poor job at balancing the claims of the present against the claims of future generations.

It is not an easy balance to get right.

Rapid economic growth in emerging economies has had a major positive effect. It has raised two billion people out of abject deprivation and halving infant mortality.

This has been driven by capitalism, on occasion in an extreme and uncontrolled form. This has also had important consequences for the environment.

Ill treatment lies beneath the surface in terms of child workers, pollution, and habitat destruction.

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Figure 1: Real and urgent challenges face the world

Source: Albion Strategic Consulting

You can respond to these challenges and become part of the solution. Or you can bury your head in the sand. Just understand that they’re not going away.

Many people have made changes affecting their lives which are making meaningful differences.

This can be anything from running more fuel-efficient cars to buying local products. You can also make sure that you avoid companies with bad records on employment practice.

Indeed, one option too often overlooked is improving the sustainability of our investment portfolios.

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Figure 2: Being part of the solution

Source: Albion Strategic Consulting

Do you know what sustainable means?

It means each of us playing our part towards making the world a better place. It means defining a more balanced use of nature’s resources, then acting on that knowledge. Tackling the issue of climate change, as well as the knock-on effect it has on desert creation, economic migration and ecosystems.

It means building a fairer society. One where workers get a fair deal, and one with fewer extremes of wealth and poverty. And where good corporate governance improves the level of responsibility in the drive for profits.

The United Nations has established 17 sustainable development goals.

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Figure 3: What is sustainability?

Source: United Nations

Regarding investment portfolios, sustainability means we need more information about companies. Information that reflects their activities in the real world.

These data would be rigorous, regulated and a truthful reflection of how the company operates.

There is a gap between perfect data and reality.

Pursuit of perfection should not prevent you from at least making a start.

Pressure from investors can force companies to be more transparent, both now and in the future.

This can only be good.

ESG – environmental, social and governance

The investment world increasingly talks about the environmental, social and governance issues faced by companies.

These ESG data inform the investment decisions that fund managers make.

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Figure 4: Incorporating sustainability in a portfolio using ESG

Source: Albion Strategic Consulting

In life, you make trade-offs.

Take the issue of recycling.

You try your best to recycle, as a responsible citizen. You sort plastics and paper into the green recycling bin for collection.

Still, you leap into your petrol-fuelled car and head off on a long-distance holiday.

You make compromises and trade-offs, and you deal with them.

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Figure 5: Appreciating the trade-offs we face

Source: Albion Strategic Consulting

You also face trade-offs when it comes to structuring an investment portfolio.

You own an investment portfolio to grow or protect wealth. You also want to generate income for the present and the future, and your lifestyle is partly driven by your portfolio returns.

Traditional portfolios deliver diversified, broad market returns, derived from risks you are comfortable in taking.

Some investors who hold deep beliefs face concentration, liquidity and exit risks.

This is impact investing.

For others, it's about getting broad market returns in return for broad market risks.

If the return is sustainable, great.

Here, success involves pragmatism and trade-offs. Such as maintaining sector weightings in line with the market.

This means owning energy and airline stocks, because you need fuel for cars, gas for power stations, and flights for holidays.

This is systematic ESG investing.

In the middle sit thematic portfolios. These might, for instance, focus on renewable energy, such as wind farms. This option means investing in smaller companies and accepting sector-specific risks, often without broad, or even sector, diversity.

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Figure 6: Understanding the trade-offs in a portfolio

Source: Albion Strategic Consulting

ESG credentials, on a firm-by-firm basis, help us to make judgments on companies. This reflects the makeup of portfolios.

Some firms in the oil and gas sector have set out a strong vision for the future direction of the company. This leads innovators and investors towards renewable energy, and helps power the transition to a carbon-neutral future.

Better firms reduce the risks within their business and treat their stakeholders well.  

Others in the sector lag behind.

A systematic ESG portfolio promotes the better companies. The laggards get relegated.

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Figure 7: Favouring best-in-class companies

Source: Albion Strategic Consulting

The worst firms – like those producing cluster munitions – get excluded.

The same goes for the worst CO2 emitters.

This puts strategy at the centre of portfolio construction, at fund level.

Systematic ESG funds are available in global and emerging markets.

Other asset classes tend to have limited quality products available. On the other hand, the good news is that ESG is seeing rapid product development.

When funds meet the appropriate standards, they can be included.

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Figure 8: Taking those first steps

Source: Albion Strategic Consulting

The journey towards sustainability should be taken in careful, measured steps.

Over time, corporate ESG data should improve. And as data quality gets better, so will our ability to monitor results.

Product development in systematic ESG is growing and the quality here will also be higher.

There’s never been a better time for investors to make a difference.

It may be a long road, but the destination should be worth it.

Figure 9: The destination is worth it

Source: Albion Strategic Consulting

Positive change is no longer a dream. You can start to achieve it today.

Making the future a better place. Climate change under control. Clean seas. No child workers.

When the one becomes many, change happens.

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If you would like to know more about our ‘Steps in the right direction’ portfolios, please contact us.


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