The Dilemma with ESG Investments and Our Investment Solution

In the last 10 years especially, consumers have become more aware of what they are buying and who they are buying from. This is demonstrated by people trying to use fewer plastic products and products which may be sourced unethically or have a negative social impact.

As a result of media scrutiny, some company marketing campaigns focus on the ethical and social impact of their products, illustrating how they are using less materials or improving practises that could be considered damaging to the planet or workers.

Naturally, some investment funds are also playing their part by investing in socially and ethically impactful assets. Such investments are commonly referred to by the acronym “ESG” Investments.

ESG unabbreviated stands for Environmental, Social and Governance. Environmental investments relate to investing in assets which align with personal beliefs around the environment. Social investments invest in assets that have social impacts such as community development. Governance investments focuses on good company governance such as fair employee pay and working conditions. Investment firms may choose one or a mixture of environmental, social and governance investing.

You might be forgiven for thinking investing in ESG is completely “ethical”. After all, choosing these investments is perhaps a step in the right direction. However, there are issues many investors are unaware of.

For example, funds may use exclusion methods as part of their investment approach. This means that no more than a specified percentage will be invested in an industry/region at once. For example, a fund may be selected for omitting tobacco products. However, such a fund may actually state that no more than 5% may be invested at any time in tobacco. Therefore, not completely adhering to the investors wishes.

Similarly, companies investing in social investments may only be able to guarantee a specified percentage of the investment is being usually for socially impactful purposes.

Though some investors are aware of fund limitations, an aspect they may not be aware of is that many companies supply chains are not by the transparent or completely ethical. Therefore, the company someone invests in may appear ethical, but their suppliers may not be.

The case for this is seen in the production of electric vehicles (EVs). Such a product has obvious benefits such as not using fossil fuels. However, EVs require lithium and cobalt – both of which involve mining in central Africa where worker conditions are very poor.

In general, workers are paid low wages – sometimes just a few pence an hour; conditions are poor and dangerous – workers can become severely sick and mine collapses are recurrent; and job security is very limited meaning workers often feel they have no choice but to continue working.

Knowing that investments (like people) aren’t absolute (even when appearing to do the right thing), what can be done?

This relates more to individual philosophical preferences, something we have recognised and so are partnering with a company who specialise in ESG investment analytics. Our new partner was selected for their highly rigorous analytical critiques, but how do they choose investments and what is their philosophy?

The United Nations (UN) have set 17 sustainable development goals as part of their Sustainable Development Agenda 2030. These goals include progression in education, climate change, gender equality, the environment, health, social justice, and energy.

Based on the UN Sustainable Development Goals, our partner has derived 4 investment themes where each theme will encompass a number of development goals and aims to provide high growth sustainable trends.

By creating the investment theme framework which looks to address development goals, the investment proposition then selects “best-in-class” assets and allocates capital to businesses who are making the greatest amount of difference.

We recognise that “best-in-class” investments do not necessarily represent a “perfect” business. However, the rigorous analysis ensures companies are scrutinised to a very high degree, and issues such as unethical supply chains are considered and negatively scored in their respective classes.

Therefore, our investment proposition could greatly benefit those looking to try and make the greatest level of difference when investing.

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17 Nov 2022

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