What is ESG?
It is difficult to find a definitive and simple ESG meaning online. The acronym ESG is an abbreviation of Environmental, Social, and Governance. It is often associated with ESG investing or ESG finance but more broadly it can be a methodology or ethos that organizations can follow to guide their actions and behaviors.
ESG as it relates to ESG finance, it is a little more specific. ESG fund managers who who utilize ESG in their investment decisions will create an ESG policy framework for their fund or funds. These guidelines will determine what the ESG fund can and cannot invest in. The criteria for ESG frameworks will vary from various investment managers - some will have more comprehensive ESG sustainability credentials than others, so it is important to note that not all ESG funds are created equally.
ESG investing in Ireland is provided to customers by a handful of ESG fund managers. In general, they will at least consider the E, S, and G elements of their funds in order to make ESG investment decisions that will match with their investors ethos and requirements.
If you were an ESG fund manager, what investment decisions would you take when considering what companies or industries to include in your ESG fund?
Environmental: How will your collection of investments have an impact on climate change, natural resources, pollution and waste, and energy use. These elements would not have traditionally been considered by fund managers. When we consider this more thoroughly we can start to see how all of these important elements could be significantly impacted by companies and investments in your ESG fund. As an ESG investor, you are in a powerful position to reduce harm considerably.
Social: Social aspect may be slightly less obvious at first, but as an ESG investment manager, how would you consider the employee working conditions, health and safety, employee relations and diversity, or data protection policies of the companies you choose to invest in? To maximise your long term returns and avoid potential share price catastrophes, how should you assess and think about these issues.
Governance: Company boards and management report to shareholders. As an ESG fund manager, what would your ESG investing criteria include around issues like executive pay & bonuses, bribery and corruption, board diversity, and shareholder voting rules. If we pause to contemplate the potential downsides of not considering these issue, the implication could be significant for your investors.
As an ESG fund manager in Ireland, how would you implement these guidelines on a daily basis?
Step one, you would likely assess the entire universe of potential investment options. You and your ESG fund management team would need data on the environmental, social, and governance behaviour and metrics of the potential investments and you would create a formula in which to order, rank, and include or exclude.
Next, you would likely start to exclude industries or companies that you were outside the acceptable norm for ESG funds. It is likely that carbon heavy industries like coal, oil, and gases would be excluded, along with other generally accepted bad actors like tobacco and weapons companies. The remaining potential investment options could be included or excluded based on traditional stock selection metrics AND the ESG criteria of the company or bond. You may decide to put an emphasis on climate change, or social aspect. Corporate governance and behaviour may be more important. Or you may wish to target all aspects of ESG through your fund along with targeting some/all of the sustainable development goals.
Going forward, your ESG fund team would continue to collect data and monitor company behaviour. In order to affect change in the companies you hold, you may first engage with the management team. As owners of the companies you invest in, you do have sway over the decision making process. If engagement doesn’t achieve your goals, you may choose to vote against the board on issues which can be publicly embarrassing, especially if you are a majority shareholder. Lastly, you have the option to exclude the company from your funds if you feel that they have not met targets or have breach your funds ESG criteria. Although this may be a last resort, the threat of divestment is often enough to have an impact on corporate behaviour.
Your ESG fund manager is simply an extension of you and your preferences
If you wish to understand the true meaning of ESG, start to put yourself in the shoes of an ESG fund manager. ESG is more than just divesting from fossil fuels, it is a concept and practice of how to invest capital in a sustainable way. This methodology will allow you to start to seek ESG Investment fund managers in Ireland that match your own ethos, beliefs, and requirements for your future goals.
ESG investing in Ireland is available via a number of socially responsible investing companies. At Ethico, we are happy to advise and give clear comparisons between ESG fund managers, their ESG criteria and show you how to avoid "greenwashing".
If you wish to discuss ESG in more detail please make contact and one of our advisors will be happy to discuss your options.