When we buy shares in a company or lend money to a company, we’re usually doing so because we expect to be able to grow our money more quickly than if we put the cash to use elsewhere.
Some investors are content to focus on the idea of making a profit alone, but some investors might feel uncomfortable about profiting from the activities of certain companies. A classic example is tobacco. Cigarette manufacturers make their money by selling addictive products that are unquestionably bad for their users. Even if they can make good money by doing so, a significant number of investors don’t want to profit from that activity. Other investors may want to avoid fossil fuel companies, or weapons manufacturers, or companies that pay their staff poorly. This all comes under the broad umbrella of ethical investing.
ESG investing – that is, investing with a focus on environmental, social and governance issues – is merely the latest incarnation of ethical investing. The main shift of emphasis with ESG is the idea that being a good corporate citizen actively benefits the bottom line. In other words, ESG investors argue that they aren’t sacrificing returns for principles. Instead, it increasingly makes sense to avoid companies that are linked to sectors or behaviours that society wants to move away from. It’s not hard to find practical examples. For example, a growing political emphasis on climate change and renewable energy has resulted in oil producers badly underperforming wind and solar power companies in recent years.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
One objection however, is that there is little consistency in how ESG scoring is applied. There are many different ways to “screen” companies, and not all will throw up the results you might expect. Similarly, many companies have been accused of “greenwashing” – that is, paying lip service to ESG values for PR purposes, without actually changing any of their working practices. In short, if you genuinely want to ensure that an investment is compatible with your own values, you’re going to have to work much harder than someone who simply feeds their money into a stock market tracker fund every month.
-
8 of the best houses for sale for around £1mProperty Houses for sale for around £1m – from an apartment in a converted church overlooking Abbey Road Studios, London, to a Georgian house in Devon with views towards Dartmoor
-
Rightmove: Autumn Budget pushed down asking prices but values will rise in 2025Asking prices dipped by more than usual in October amid fears of tax rises
-
Ethical investing: your guide to ethical bankingAdvice There are plenty of ESG funds to choose from – but what about your day-to-day saving and spending needs? We look at the best ethical current and savings accounts
-
Ethical investing: how ethical is your ESG fund?
Advice There’s no doubt that environmental and other issues can have a huge impact on share prices – 2020 has proven that beyond doubt. But how can investors ensure they are backing the right ESG funds?
-
Ethical investing: how to find an ESG tracker fund
Advice The number of ethical exchange-traded funds is growing ever larger – David C Stevenson outlines your options.
-
Three green stocks for growth investors to buy now
Tips Professional investor Luciano Diana of the Pictet Global Environmental Opportunities Fund picks three stocks with strong environmental credentials that should help safeguard the world’s natural resources.
-
A record year for "ethical" ESG funds
News UK-based ESG funds - those concerned with "environmental, social & governance" or more ethical investing – saw £362m of inflows in July, a new monthly record.
-
ESG investing provides shelter in the stormAnalysis Funds focusing on environmental, social and governance (ESG) issues proved resilient during the market slump.
-
Ethical investing: the price of your principlesAdvice Sin stocks tend to beat the market – but that doesn’t mean ethical investing must always lead to below-par returns.
-
ESG and “ethical” investing: where should you start?Tips “Ethical”, or ESG investing (environmental, social and governance) is all the rage. But what exactly does it mean? And where should you start? Merryn Somerset Webb explains.
