ESG investing means considering environmental, social, and governance factors when deciding how to invest explains Independent Financial Adviser Seb Lewis.
ESG investing continues to grow and more investors are considering how they reflect their values in financial decisions. It covers a broad range of areas, but here are some of the trends that are set to affect ESG investing this year.
The rise of net zero pledges
As part of commitments to reduce companies’ contributions to climate change, many firms have already made pledges to reduce their carbon emissions. In 2022, it’s expected that more will make net zero pledges.
Seb said: “A net zero pledge means a company commits to removing as much carbon from the atmosphere as it adds. This will involve companies reducing the amount of carbon they produce by making changes to their operations.
“In addition, the number of companies that engage in carbon offsetting is also expected to rise. This will allow firms to offset those emissions they can’t remove from their process by supporting projects that remove emissions.”
Some companies have already made net zero targets, including Microsoft, BT, Sainsbury’s, and PwC. The range of companies that have already committed highlights how it’s a trend that will cross different industries.
However, investors still need to keep greenwashing in mind. Greenwashing is where a company brands products or initiatives as eco-friendly when this is not the case.
Analysis conducted by the NewClimate Institute found that the climate pledges of 25 of the world’s largest companies in reality only commit to reducing their emissions by 40%, not 100% as terms like net zero suggest.
Addressing the social effects of climate change
Climate change has been high on the agenda for ESG investors for years. Now, social factors are gradually being incorporated into this to understand how the consequences of climate change and policies will affect people and communities.
It’s a complex area that can cover many different things. For instance, it may consider how the direct consequences of climate change, such as more extreme weather events, will affect communities and how companies should respond to these events. Or it may look at how the transition away from fossil fuels will affect the progress of countries that are still developing.
The push to consider the social effects of climate change is partly being driven by a pledge made at the COP26 climate conference in November 2021.
The conference brought together governments and other parties to agree on action towards climate change goals. During the conference, more than 30 countries pledged to support workers and communities that will be harmed by the transition to a green economy.
As ESG becomes more mainstream, we’ll likely see more issues that combine the three core areas in some way to tackle complicated challenges.
Scrutinising supply chains
The last two years have highlighted how important supply chains for businesses are, and just how global.
Seb added: “Due to the pandemic, many firms experienced a disruption in their supplies and operations, with the effects being felt across entire supply chains. Even now, some businesses are still struggling to access the materials and products they need to operate at the same level they did before the pandemic.
“A robust supply chain can provide security for businesses. On top of this, whether a supply chain reflects a company’s ESG commitments will also come under closer scrutiny.”
While this trend can provide more confidence for ESG investors, reviewing complex supply chains could present challenges for both companies and investors.
Pressure for companies to pay their “fair share”
The amount of tax that companies pay in the regions they operate has made headlines in the last few years. Again, the effects of the pandemic mean this trend will be in the spotlight even more.
As governments were forced to borrow more money to provide health and social support during the pandemic, taxes are expected to rise. As the tax burden increases for individuals, it’s anticipated there will be growing pressure for businesses to pay their “fair share”, particularly if they benefited from government support during the pandemic.
While large companies hire whole teams to ensure they pay the correct amount of tax in each jurisdiction, these teams will also use loopholes and reliefs to pay as little tax as possible. As pressure grows for companies to pay a “fair share” it will be interesting to see how this translates to company policy and investor action in 2022 and beyond.
Increasing demand for standardised reporting
Seb continued: “As greenwashing becomes a key concern for investors, there will be an increased demand for regulation and reporting standards.
“At the moment, it can be difficult to hold firms accountable if they make claims or set vague targets in their reports. This can also make it challenging for investors to compare different investment opportunities against their ESG criteria. To combat this, there will be an increase in demand for more standards.”
This is a process that the Financial Conduct Authority (FCA) has already begun. Last year, the FCA published a discussion paper on potential criteria for classifying and labelling investment products that would provide investors with more clarity. However, it’s likely to be a slow process and many years before standard reporting is seen across the industry.
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Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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