Understanding & Implementing an ESG Strategy in Your Portfolio

Understanding & Implementing an ESG Strategy in Your Portfolio

The importance of ESG and smart investing has gained more attention over the last decade. Research conducted by Sky News showed an alarming £2 in every £10 invested in Great Britain in an average pension is still linked to deforestation, amounting to some £300 billion of UK pension money.

But what is ESG and what is the case for investors to start implementing ESG strategies in their portfolios? In this article, we explain what ESG is and how can you start implementing strategies that will not only impact the environment more positively but the performance of your portfolio.

ESG Overview

ESG, or Environmental, Social and (Corporate) Governance, can help investors to understand the impact that their investments have environmentally and whether their portfolios are in-line with their overall ethos. An ESG score for stocks is calculated using 4 main data sets: Environmental, Social, Governance and Controversies. For a more extensive understanding of how ESG scores are calculated, please visit our overview page here.

Why is it important?

In response to the growing interest in helping the environment, a lot of companies have started to fabricate and exaggerate what they do. This is known as greenwashing and has led to investors demanding more information and transparency from investment companies about their environmental footprint and how their actions are helping to mitigate it.

This increase in interest in ESG from investors is a direct result of the world heading towards a climate crisis. It’s no secret that changes to the globe’s overall temperatures are causing irreversible damage to humans, animals and ecosystems. According to The Global Risks Report 2022, three of the five most likely risks identified by global business leaders are environmental.

Not only that but promoting a sustainable economy can potentially bring many investment opportunities. That’s why it’s important for investors to have access to transparent, high-quality information to assess the risks and opportunities related to climate change and other ESG issues. Initiatives such as TCFD (Task Force on Climate-Related Financial Disclosures) and GRI (Global Reporting Initiative) provide a framework for companies to report these.

How ESG can provide better returns

Here are a few examples of how ESG can provide better investment returns in certain instances. A report from Fidelity International in 2021 found that there is a relationship between growth and ESG quality, highlighting that companies with a strong sustainability rating had the highest levels of historical dividend growth, at more than 5% in the past five years, while those with weaker ratings offered the lowest average levels of dividend growth.

To demonstrate the above findings, we checked 3 different ETFs and their performance over the last decade. In the chart below, the blue line represents an ETF which tracks the MSCI World Index but excludes stocks which don’t have strong ESG ratings. The fund represented by the red line tracks the MSCI World Index with no exclusions. The green line represents an energy stock ETF tracker, which is typically less likely to have high ESG scores due to its overall environmental impact.

ETF stock

Interestingly, the ETF which excludes stocks that have less favourable ESG ratings have seen considerable growth over the past 10 years compared to those that didn’t. Although the energy stocks are showing lower growth, there seems to be an uptake over the past year due to recent geopolitical events around the world. These findings show that there is a strong argument for having ESG-focused funds in your portfolio.

How Brite Advisors can provide beneficial ESG investing

At Brite Advisors, we have created a flexible, transparent and expertly built equity and fixed income savings product so you can invest and save together. Our pension portfolios offer clients a distinct advantage as they provide a low cost, end to end solution. This transparent investment approach broadly tracks the market delivering better returns and over time consistently growing clients’ retirement savings.

Within our platform, you can invest in ESG-focused portfolios to reap the potential financial benefits these stocks can offer and align your morals and values with your investments. Get in contact with one of our friendly advisors to see how we can help you further.

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