There’s so much to learn as a new investor but making sure the ESG is in order early on will pay off in the long term.
Environmental, Social and (Corporate) Governance (ESG), represents a series of non-financial factors that indicate how a company can grow in a sustainable way, respecting both people and the environment.
The UN-supported Principles for Responsible Investing encourages shareholders to take these into consideration and in turn contribute to a more sustainable global financial system.
According to Damian Payiatakis, head of sustainable and impact investing at Barclays Private Bank, newbie investors can incorporate sustainability into their trading decisions in three ways – ethical views, fundamental analysis and sector selection.
As a starting point, investors need to identify what companies or sectors don’t align with their personal or religious values and exclude them from their portfolios. These can range from issues with substances such as alcohol and firearms as well as broader concerns such as the use of fossil fuels and women’s reproductive rights.
Once that’s settled, investors will then assess how well the organisation manages underlying ESG risks that could affect its financial performance.
“It is important for investors to be aware of the material ESG risks for each sector, and then reach an informed judgement of how well a company is managing them,” Payiatakis told Proactive.
“This internal analysis of a company’s operating practices can be applied across every sector – whether it’s a mining company, fashion brand, tobacco firm or cleantech company.”
Finally, investors can choose to invest in companies that are looking to solve major environmental or social issues.
“Climate breakdown, depletion of natural resources, biodiversity loss, under-employment and under-education, health and wellbeing issues, lack of diversity and equity,” Payiatakis added.
“These are multi-decade long, thematic challenges that require capital and innovation. Therefore, they present massive opportunities for companies who can address them, and investors who spot them.”
“In sum, three strategies – avoid companies that you personally dislike, use ESG analysis to select better-run companies, and find opportunities where companies provide solutions to our global challenges.”
Sustainability has been a hot topic for a while now and it’s more than just a trend, according to Payiatakis.
With governments worldwide making net-zero commitments, regulators are incorporating this change into market regulation.
What’s more, institutional managers are understanding the importance of addressing sustainability issues to secure worthwhile investments, while the wider public is increasingly interested in how products and services it receives have been made.
“We can say sustainable investing can no longer be questioned as a fad or fashion. But rather it will be fundamental to how we invest in the future,” Payiatakis concluded.