Can I save the planet and still make money?

Environmental, Social and Governance (ESG) investing has been around for a while but is now gaining traction as an approach to the choice of investments.

Socially conscious investors, and that means more and more of us, are looking to invest in companies which don’t just provide good financial returns but whose values align with their own. Matters to scrutinise include:

• Environment: Does the company use toxic chemicals in its manufacturing processes. How is it reducing its carbon footprint? How is it reducing energy use and husbanding scarce resources?
• Social: What is the business doing to foster equity, diversity and inclusion? How is it ensuring that its ethical values are reflected in its supply chain?
• Governance: How does the company’s leadership deal with executive pay? How diverse is its leadership? How does the company interact with its stakeholders?

Although millennials are driving the trend towards ESG investing, the desire to invest according to values is spreading across the generations. According to the Prudential’s Family Wealth Unlocked report, 61% of those surveyed said they cared more about the environment and sustainability than before the pandemic. 60% of millennials, 44% of Gen-X and 35% of Baby Boomers confirmed that the pandemic has increased their appetite for sustainable investment. 39% are planning to increase the amount of their ESG investment in the next five years. These are big numbers and indicate that ESG investing is, or is certainly becoming, mainstream.

But do you have to sacrifice returns in order to invest ethically? Not necessarily. There is an increasing body of evidence that, in the longer term, companies that take ESG seriously may outperform their non-ESG rivals.

In many cases, investment in companies which score well on ESG criteria can also be justified on financial grounds, and it is the very fact of their approach to ESG factors which improves the company’s long term sustainability and performance profile. Financial and moral considerations are likely to become more closely aligned.

For example, a company that uses vast amounts of energy will be exposed to rising energy costs and a company whose processes pollute the environment will be affected by potentially expensive changes to regulation and tax, potential environmental liabilities and reputational damage. A company that looks after its workforce may have higher productivity and enhanced brand value and reputation. A well-run company with transparent oversight and disclosure and proportionate executive pay is likely to be more successful and have a more stable share price.

And what about your family trusts?

Does the law allow trustees to take ethical considerations into account when making investment decisions?

Trustees have an overriding fiduciary duty to act in the best interests of all the beneficiaries and case law makes it clear that ‘best interests’ normally means financial interests so that the ‘paramount duty of the trustees is to provide the greatest financial benefit for the present and future beneficiaries whilst having regards to risk’.

The recent High Court case of Butler-Sloss v Charity Commission provided helpful guidance on ESG investing to charity trustees, and indeed all trustees. In that case the court held that charity trustees had exercised their investment powers properly and lawfully where they had adopted an investment policy which imposed strict environmental criteria on proposed investments which greatly limited their potential investments, but had balanced that against the possible financial detriment that the policy might cause. It was important that the investment policy set out the financial returns that they were to aim for and that the portfolio performance would be tested regularly against recognised benchmarks to ensure that appropriate returns were being achieved.

On the other hand, as we have seen, there is increasing recognition that ESG factors are relevant to the future success, or failure, of a company,

The take home message is that it is becoming increasingly clear that ESG considerations feed directly into investment performance and trustees and investment managers can, and perhaps should, be taking this into account.