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Michal Lancemore

ESG and Renewables Investment

Written by Michal Lancemore

People invest in Environmental, Social, and Governance (ESG) funds for a mix of ethical and financial reason:

Ethically, many investors are increasingly conscious of the social and environmental impact of their investments. They want to ensure that their money is being used to support companies that align with their own values, whether that’s environmental sustainability, social justice, or strong corporate governance.

Financially, ESG investments are often viewed as less risky. Companies that adhere to ESG criteria are generally considered to be more responsible stewards of capital, which can make them less susceptible to environmental fines, social boycotts, or governance-related scandals. This risk mitigation can be particularly appealing to investors who are looking for more stable returns over the long term.

Investing in ESG and renewable sectors can align with both ethical considerations and potential financial growth. It aligns with future trends and market dynamics and by investing in them, you’re positioning yourself ahead of the curve, ready to ride the wave of change and potentially benefit from the increasing demand for sustainable products and services.

However, like any investment, it’s essential to conduct thorough research and consider seeking professional advice tailored to your specific needs.

The top three Pros and Cons that I think of when I consider ESG funds are:

PROS

Competitive edge

By having a strong ESG strategy, companies can gain a competitive advantage in the market. More and more customers are becoming conscious of the environmental and social impact of the businesses they support, and they prefer companies that align with their values.

It can also benefit a company internally. Employees are increasingly looking to work for companies that care about making a positive impact on the world. By prioritizing ESG, companies can attract top talent and boost employee engagement and productivity.

Long term investment incentive

There is a consensus that investors who can form some sort of attachment to their funds tend to stick with them when things get a little turbulent in the markets which is a good thing for most long-term investors who need to have a buy and hold strategy. That’s a very valuable behavioural component that ESG investing provides.

Be the change you want to see in the world!

ESG investing allows you to put your money where your values are. By investing in companies that prioritize environmental, social, and governance factors, you can contribute to making a positive impact on the world, and hang your ‘Climate Action Now” sign with pride.

CONS

Greenwashing

One of the main disadvantages of ESG criteria is that companies are not required to disclose all information related to their sustainability practices. This can make it difficult for investors to evaluate the sustainability and ethical impact of investments.  Some companies may claim strong ESG credentials without fully committing to sustainability practices. This greenwashing can mislead investors, making it vital to research and verify a company’s commitments before investing.

Expense

Fees may be slightly higher for ESG funds—which can eat into earnings. ESG funds require managers to do research, and they’re often working with a smaller asset base, which means a greater expense.

Returns

ESG investing has shown strong financial performance over the years. Numerous studies have indicated that companies with robust ESG practices often outperform their peers in terms of long-term financial returns.  However, restricting an investment approach in any way is going to mean missing out on some return opportunities. Thinks FANGS.

General Considerations

Ethics are subjective

Investing according to ethical principles is not simple. People have different opinions about what is ethical – not to mention the fact that these issues are constantly evolving. Environmental science, social justice issues and corporate governance theory all raise somewhat different questions today than they did 25 years ago, and they will probably introduce new themes in the next 25 years.  So before you invest in an ESG fund, it’s important that you understand the criteria the fund uses to define their ESG strategy. “’Socially responsible’ sounds nice, but can mean vastly different things to different people, which means it is crucial to ensure the fund’s core values line up with your own.

Self-Assessment and Goal Setting: Before diving into any investment, you must evaluate your financial situation, risk tolerance, and investment objectives. This self-assessment will help you align your investment choices with your broader financial goals.

Diversification: Spreading your investments across different companies or sectors can help mitigate risk. This is particularly important for someone like you who is looking for a balanced risk profile.

Long-term Perspective: ESG and renewable sectors often require a long-term investment horizon. Be prepared to hold your investments for an extended period to maximise their growth potential.

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