24 Oct 2019
The movement towards more sustainable investment opportunities in 2019 is driven by both big institutional investors and millennials, and this theme is reinforced by the findings of our recent survey of high net worth individuals. For example, when asked how important or unimportant it is that the companies and funds they invest in are responsible, 76% of respondents said this was important.
In response, we have introduced our own ESG Portfolio Service, to help our clients take a more responsible approach to investing, while still doing their best for their long-term financial security.
What does ESG stand for?
ESG stands for environmental, social and governance:
ESG investing considers the above factors alongside traditional financial metrics, with the objective of creating a more sustainable investment portfolio. An example of this is last year when, despite better growth characteristics, ESG investors shunned Facebook in favour of Microsoft, due to the former's concerning ambivalence to subscriber data privacy and poor regard for shareholder rights.
Good returns or good works – do you still have to choose?
Until recently, allocating capital was viewed as binary. You had to choose between philanthropy and profit – you couldn't have good returns generated by doing good. Now the industry acknowledges that there is something in between: well-governed companies that put thought into their environmental and social mission. Some of these make a positive difference by solving real world problems; others are more focused on avoiding risks to their business model. Think of a seatbelt manufacturer preventing road deaths, or a drinks manufacturer making lower-sugar products.
The industry has responded positively to this trend:
ESG has more definitional rigour than terms like 'ethical investing' and 'socially responsible’ investment portfolios. It is also more data driven, with companies reporting on areas like resource efficiency, employee training and board independence. Performance has been encouraging.
Every little helps at Tesco
Tesco’s most recent results contained an interesting admission from the relatively new CEO, Dave Lewis. He argued that previously stratospheric profit margins could not be maintained at the same time as looking after suppliers, employees and customers. This stands to reason. You can make more money if you underpay your staff and suppliers, and overcharge your customers. His strategy is to aim for lower but more sustainable profits, and better relations with staff, suppliers and customers. Tesco's recent share price strength shows that the market agrees.
Most ESG funds rank companies against their peers, based on how well they have performed according to ESG characteristics. Take this example from the oil and gas sector:
Slow and steady progress towards sustainable investing
This is an important point. Sudden shifts can be exciting but impractical, as they disturb the existing order. What’s promising about the shift toward ESG investor opportunities is that interest in it is huge, but the mechanics are happening gradually, so things like portfolio diversification are not being upended. There is a push towards preferring investments in companies that score well on ESG, rather than an ideological purge of half the Dow Index. Sensible portfolio management principles like diversification have not been abandoned at the altar of moral virtue.
A key investment theme for 2019
We see ESG as a structural investment theme rather than a cyclical one. A combination of attractive performance characteristics and inflows into the asset class make it impossible to ignore.
If you want to find out more about sustainable investing in 2019, please contact our Head of ESG Investments, Patrick Thomas, on email@example.com or +44 20 7523 4988 – or get in touch with your Investment Manager.
 Survey conducted by YouGov on behalf of Canaccord Genuity Wealth Management. Total sample size was 500 HNWIs. Fieldwork was undertaken between 3 and 11 September 2018. The survey was carried out online.
Our portfolios are designed to work over a typical investment cycle of 7-10 years, so we recommend you stay invested for at least seven years.