Most of us recycle our plastics and care about fair working conditions, so why shouldn’t we have the same standards for the companies we invest in? Thanks to the rise of ESG funds, more people are investing their money in a socially responsible way, taking into account environmental, social and governance factors. Here’s what ESG investing is and why it might be for you – aligning your investments to your values and helping to build a better world.
What is ESG investing?
ESG stands for environmental, social and governance, and ESG investing lets you get exposure to the stock market while following socially responsible principles. Do you care about whether companies pay workers a fair wage, or how diverse a company and its board of directors are? Do you want to know that a company’s supply chain is responsibly managed, and that it’s taking steps to reduce its environmental impact? Well, ESG investing lets you champion these factors and more – ensuring that your investment strategy is benefitting more than just your bottom line.
Why is ESG investing becoming so popular?
ESG investing has been gaining in popularity – especially since environmental awareness, social justice and fair treatment for workers have become increasingly important to a larger number of investors.
Because of this, companies have had to increase their focus on ESG factors to remain competitive, especially with certain demographics like millennial investors. People think it’s important that companies have a larger focus on ESG – and an interesting fact grabbed headlines a few years ago when the Carbon Majors report showed that just 100 companies were responsible for around 70% of global emissions.
Best ESG funds and companies
To find the best ESG fundsFunds, also called ‘tracker funds’, are financial instruments that have been set up to match or ‘track’ the price of a market index. Investing in a fund lets you get exposure to different financial assets like shares and bonds, without having to buy them directly. and companies, you’ll need to use a search tool like the one offered by MSCI. ️ It ranks thousands of global funds and companies using ratings from CCC (for funds and companies that are lagging behind their competitors) to AAA (if they are leading the way in their industry for ESG).
It’s a useful tool if you want the full details on just how closely the funds and companies you want to invest in champion ESG values. Not only is this good if you’re an investor, it’s also good information to get familiar with for your pension.
How are ESG ratings calculated?
To give you an idea of how ESG ratings are calculated, we’re going to look at how MSCI produces their World ESG Index.
First, MSCI eliminates companies that are involved in very serious controversies involving the environmental, social, or governance impact of their operations, products and services. These companies won’t be included.
This is known as the ‘controversy score’, and it’s ranked on a scale of 0 to 10, with 0 being the most severe controversy. MSCI also excludes companies that are involved in controversial business activities including alcohol, gambling, tobacco, nuclear power, conventional weapons and nuclear weapons.
Next, MSCI assesses and scores the remaining companies within its World ESG Index based on their ESG risks and opportunities relative to their industry peers. The three pillars of environmental, social and governance can be broken down into 10 themes, including climate change, natural resources, human capital, product liability, corporate governance and corporate behaviour.
The assessment factors include criteria such as how companies respond to climate change, treat their workers and manage their supply chains. Company scores are adjusted for each industry and then mapped to a letter rating, ranging from ‘AAA’ to ‘CCC’.
Finally, the companies are ranked on their ESG rating, and the top 50% of companies (based on market capitalisation) in each industry and geographical region are selected for the MSCI World ESG Index.
Our Old Mutual MSCI World Selection Index Fund – labelled as Global Shares ESG in-app – tracks the MSCI World Selection Index, and it’s not the only ESG fund that we offer. Check out our full range today to see the other ESG investing opportunities we offer.
* Aviva. Understanding the power of your pension: Pension fund carbon savings research 2021
** ONS, Pensions in the National Accounts, 2021
*** Aviva, 2021
