Ahead of our time?
By Fortitude
There’s a lot of noise these days about Environmental, Social and Governance (ESG) funds. It’s almost an industry buzzword. So, you’d be excused for thinking that it’s a new thing.
At Fortitude, we actually made the decision to switch to ESG funds as our default back in 2019. Yes, that’s right – we embraced the future over three years ago and shifted everything lock, stock and barrel. And we haven’t looked back.
The history of ESG
As we’ve said, ESG investing isn’t a new invention. Go back to the 18th century, when the Quakers and Methodists were the first to outlaw putting money into what they viewed as amoral industries or ‘sin stocks’. Then in the 1960s, a growing body of people decided to exclude some companies or industries from their portfolios because they didn’t like the way they operated. Some chose to steer clear of any business in South Africa because of its Apartheid links, while others chose not to invest in arms or tobacco manufacturers. Fair enough. The thing was, while many people admired these investors for sticking to their principles, everyone believed it came at a price. Namely, poor returns.
That viewpoint started to change in 2004 when the term ‘ESG’ first graced the pages of a report called Who Cares Wins, Connecting Financial Markets to a Changing World. Produced by the United Nations and Swiss Federal Department of Foreign Affairs, the report recommended ways that the finance industry could embrace environmental, social and governance factors. But perhaps the turning point really came in 2020. Larry Fink, the boss of BlackRock, the world’s largest investment firm, said that principled investing was neither ideological nor ‘woke’, but the best route to obtaining long-term rewards from businesses. That’s when the floodgates really opened.
Fortitude out in front
Even before Larry made that ground-breaking statement, we’d already made the decision to switch to ESG funds in our portfolios. Why? Well, it’s something that we had thought long & hard about. We knew in our heart of hearts that it was a good thing to do. It was certainly something that aligned with our views & values, but, of course, we had to balance that with what was best for our clients.
After much deliberation, discussion and research, we came to the conclusion that we could use ESG funds in our model portfolios and there should be no downside for our clients – either from a risk or a return point of view. Once we’d arrived at that place, it was a no-brainer. If you can invest in things that make the world a better place, why wouldn’t you?
What that means for you
Isn’t it good to know that if you ask us to take care of your money, you can be sure that it’s invested in companies that have a positive impact on our world?
For a company to be included in an ESG portfolio, it has to meet certain criteria in these three key areas:
Environmental
This looks at a company’s energy use, waste, pollution or conservation of natural resources. It can also look at what environmental risks a company might face and how it manages them. Essentially, it’s about what impact the company has on the environment and whether it does all it can to protect the planet.
Social
This looks at how a company treats its employees, customers, suppliers and the local community. How well does it do on diversity, inclusiveness and recruitment – and are suppliers chosen because they hold the same values? Does it give back to the local community through donations or by encouraging employees to make a difference through volunteering?
Governance
This is about how a company is run. How does it treat its shareholders, and do they get a say on important issues? It’s also about what guidelines are in place for executive pay.
It's fair to say that full compliance 100% of the time would prove challenging. At least, however, with a well-researched ESG-based portfolio, you can be confident that the highest possible ethics and business standards are being deployed in your investments.
ESG all the way
In case you’re wondering, ESG isn’t a passing fad. According to McKinsey and the Global Sustainable Investment Alliance, global ESG assets are set to exceed $53 trillion by 2025. That’s more than a third of total assets under management.
So, as we’ve believed for a while, ESG investing really is the way forward. And we wouldn’t have it any other way. If you’d like to talk to us about our investment approach or find out more about our ESG portfolios, please get in touch.