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social investment

Environmental, Social and Governance (ESG) investing – more than just a placebo

The focus of 2021’s Good Money Week, supported by UK Sustainable Investment and Finance Association, is helping people find sustainable and ethical options for investments, banking, pensions and savings.  Here Mark O’Kelly, Barrow Cadbury Trust’s Director of Finance and Operations, explains the Trust’s position on sustainable investment.

I read Tariq Fancy’s recent broadside against sustainable investment with interest.  As the former Chief Investment Officer for Sustainable Investing at Blackrock he speaks with considerable authority, and has a better insight into ‘greenwashing’ than many, but I think he does responsible investors a disservice.

Why ESG investing can work

Environmental, Social and Governance (ESG) investing may not be a panacea for all the ills of climate change and social injustice, but it is far more than a mere placebo.  At its simplest level investors use ESG to determine the risks associated with individual investments.  Poor governance or environmental or social performance can mean a higher risk for the company, so there is a higher cost of capital.  If investors in the company can engage with management to improve their ESG ‘score’ then the risk reduces and there is a potential financial benefit for investors, as well as the bonus of an environmental and social impact.  If management will not engage with investors then there is a case for selling our shares in the company.  There is growing research that this ESG approach will benefit investors in the long term and from our own experience we have seen the lower financial returns generated by companies which we have divested from for ESG reasons.

Beyond financial gains

For some investors the financial benefit is enough, but there is a growing understanding that we also need to address these issues for the sake of the planet and people.  Many charity investors will consider how they can improve ESG at companies and look for opportunities in companies which are paying attention to ESG issues, particularly those which can demonstrate a positive environmental impact. In addition to this it is essential that we work with policy makers with the aim of creating a structural and regulatory environment that supports the transition to a low carbon economy.

UN Sustainable Development Goals and sustainable growth

A responsible investment approach can have wider benefits.  An approach which takes into account the wider issues of the UN Sustainable Development Goals will drive sustainable growth and reduce the externalities such as pollution and greenhouse gas emissions  which negatively affect national and global economies.  For long term investors in suitably diversified portfolios the overall global economic performance will influence the future value of their portfolio rather than just the performance of individual companies or sectors.

At Barrow Cadbury Trust we have limited funds and resources, but we do believe that by working with other asset owners and our investment managers we can improve our financial return and achieve positive environmental and social change.

Mark O’Kelly
4 October 2021