Sustainable Investing 

What ESG investment themes should investors consider?

This article is part of
Guide to investing for good

What ESG investment themes should investors consider?

There are many environmental, social and governance (ESG) investment themes for investors to get exposure to in their portfolios.

Climate change, diversity, shareholder rights, executive pay – the list goes on.

The first of these, climate change, can certainly seem like the most pressing environmental issue as extreme weather conditions continue to affect the UK and US in particular.

The heatwave experienced by the UK this summer was a reminder of just how harsh climate conditions may get and how much our lifestyles will have to adapt if those sorts of temperatures are to become the norm.

“The most enduring theme over the past 15 years has been climate change,” suggests Christopher Greenwald, head of sustainable investment research and stewardship at UBS Asset Management.  

“Investors understand its material importance for companies, and the direct experience with the effects of climate change in Europe and the US over the past several years has made the issue more prominent.”

What are the most important ESG themes for investors to consider?

When advisers have this conversation with clients, it is important to establish exactly what issues they want to tackle through their investments – is it a thematic one? Are there simply certain companies the client wants to avoid investing in?

“For a financial adviser, the simple answer to the question ‘which are the most important areas to consider’ is, ‘it depends which issues matter most to your clients’,” says Julia Dreblow, founder of sriServices and Fund EcoMarket. 

“This, of course, points to the need for having in place processes that enable advisers to understand their clients’ opinions on social, ethical and environmental issues.”

Social risks

Ms Dreblow agrees: “There is a significant degree of consensus that the greatest risk to medium and longer term investors is climate change.”

Research conducted by HSBC Global Asset Management and published on 19 September, reports of the 204 UK IFAs surveyed, interest in social concerns, such as diversity, human rights, consumer protection, and animal welfare, is the main reason for client demand for investments explicitly incorporating ESG issues.

Figure 1: Drivers of investor interest in ESG products

Source: HSBC Global Asset Management

“Climate change is also, too often, considered to be entirely an ‘environmental’ risk – when in reality it is a ‘social’ issue also,” Ms Dreblow asserts. 

“Indeed, it is increasingly clear that changing weather patterns and the resultant droughts, floods and other extreme weather events will impact poorer people and nations more than wealthier nations, as they are less well equipped to cope with the damage caused.”

Bryn Jones, co-manager of the Rathbone Ethical Bond fund, suggests social themes are important issues for investors but that so too is governance – the ‘G’ in ESG.

“Governance is another important part of sustainable investment. Businesses that have poor governance can put cashflow at risk, and as debt investors, these risks can be significant,” he explains.