Over the past few years, we have all been making more sustainable choices in our lives, changing simple things like recycling household waste, living more sustainably to minimize waste, and going for greener ways to travel wherever possible. Unfortunately, the options for greener ways to travel are lacking in Donegal but we do what we can.
Naturally, this has started to influence decisions around finances, for instance, Environmental, Social, and Governance (ESG) Investing.
It’s not surprising that the demand from clients for Environmental, Social, and Governance (ESG) and Socially Responsible Investing products has increased dramatically.
Not only that but legislation is now in place in Europe that supports the movement.
But the questions are, what is ESG investing and why is important?
If you are considering starting to invest or save, then you will need to know about ESG Investing.
So, let’s take a look at it.
What is ESG in Simple Words?
Environmental, social, and governance (ESG) is a term used to represent an organization’s corporate financial interests that focus mainly on sustainable and ethical impacts.
So, what is meant by ESG investing?
ESG Investing may be defined as the consideration of environmental, social, and governance factors alongside financial factors in the investment decision-making process. Basically, ESG investing is a step towards several global challenges, such as inequalities, deforestation, climate change, etc
ESG Investing Donegal Introduction
The European Union (EU) has set out new rules, the Sustainable Finance Disclosure Regulations (SFDR) which aim to help investors know whether or not their investment managers consider the potential negative impact of their investment decisions on key sustainability matters like:
- The environment
- The social and employee issues
- respect for human rights
- anti-corruption and anti-bribery
before making investment decisions and if an investment is made whether they monitor and try to manage any potential negative impacts. This is intended to help customers make informed decisions about how their funds are invested.
The SFDR Regulations
The SFDR regulations set out what economic activities can be considered sustainable investments and support a more sustainable environment and society.
For example:
- how companies use resources e.g. energy, renewable energy, raw materials, water
- a company’s contribution to climate change through greenhouse gas emissions
- the impact on biodiversity
- whether companies contribute to tackling inequality or support socially disadvantaged communities
EU Taxonomy Regulation
There is also a subset of activities that can be called environmentally sustainable under what is known as the EU Taxonomy Regulation. Although the regulations in this area are still evolving, the activities are very specific:
- climate change mitigation – avoiding and reducing greenhouse gas emissions
- climate change adaptation – changing behaviours to prevent or minimise the damage climate change can cause
Criteria for companies on what business activities can be included in the following categories are expected at the beginning of 2023:
- sustainable use and protection of water and marine resources
- transition to a circular economy – producing items by reusing, repairing, refurbishing, and recycling as much as possible
- pollution prevention and control
- protection and restoration of biodiversity – the variety of animals and plant life in the world.
Fund Categories
EU Sustainable Finance Disclosures Regulation (SFDR) legislation aims to support consumer understanding of sustainability risks, under the regulations funds are being classified into one of three categories based on the fund’s sustainability objective:
ESG Indicator
- Article 6,
- Article 8 (Light Green) or
- Article 9 (Dark Green) –
Article 6 funds
Article 6 funds do not integrate sustainability considerations into their investment process
Article 8 funds
Article 8 funds (also referred to as light green), are funds that promote, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices
Article 9 funds
Article 9 funds are funds that specifically have sustainable investments as their objective, for example, investing in funds whose goal is to reduce carbon emissions
Capturing Your Sustainability Preferences
From August 2022, these regulations require us as intermediaries who provide investment advice to ask questions to identify our client’s sustainability preferences.
Typically, are 3 questions that are designed to understand more about your preferences around sustainability and how it relates to your investments.
These questions are not intended to be exhaustive and there may be additional questions to be considered.
When completed, this sustainability preferences questionnaire can be captured in a report, which can be saved as a record of your chosen sustainability preferences.
Q1. When you think about investing, is sustainability an important consideration for you?
Explanation:
Sustainable investing includes investing in companies whose practises and products are conscious of environmental topics like climate change and water usage, and social matters like labour rights and fair wages.
Answers to choose from
- I don’t have a preference
- It is an important consideration for me; I would like the environmental and social impact of my investments to be considered
- It is a fundamental goal of my investment; in addition to considering the impact of my investments, I would want to invest some or all of my money in companies that are only involved in sustainable business activities (as specifically defined under EU law).
Q2. Consider you had €10,000 to invest; what is the minimum amount you would want to be invested in companies addressing climate change, social, and governance issues?
Explanation:
Funds typically invest in a broad range of companies. In this case, we’re referring specifically to sustainable investments; investing in companies that support environmental objectives like renewable energy, or social issues like diversity and inclusion.
Answers to choose from
- I don’t mind
- €1,000
- €3,000
- €5,000
Q3. Consider you had €10,000 to invest; what is the minimum amount you would want invested in companies that actively help combat climate change?
Explanation:
The EU has set out a stricter definition of business activities that fall into this category. This includes companies whose primary focus is to help the planet through things like forestry, prevent pollution through water treatment, and protect the biodiversity of our environment through the restoration of wetlands.
Answers to choose from
- I don’t mind
- €1,000
- €3,000
- €5,000
Sustainable Investing
A sustainable investment is an investment in an economic activity that:
- contributes to an environmental or social objective
- doesn’t significantly harm any other environmental or social objective
- and ensures the companies being invested in running their companies to appropriate standards
Sustainable investments include things like:
- how companies use resources e.g., energy, renewable energy, raw materials, water
- a company’s contribution to climate change through greenhouse gas emissions
- the impact on biodiversity
whether companies contribute to tackling inequality or support socially disadvantaged communities
Environmentally Sustainable Investing
The EU Taxonomy Regulation sets out the list of economic activities that can be considered “environmentally sustainable”:
- climate change mitigation
- climate change adaptation
Criteria for companies on what business activities can be included in the following categories is expected at the beginning of 2023:
- sustainable use and protection of water and marine resources
- transition to a circular economy
- pollution prevention and control
- protection and restoration of biodiversity
Just to note: This particular regulation doesn’t include a list of what can be considered socially sustainable.
EU Definitions of Sustainable Business Activities
- Environmentally sustainable investments can only include:
- climate change mitigation – avoiding and reducing greenhouse gas emissions
- climate change adaptation – changing behaviours to prevent or minimise the damage climate change can cause
- sustainable use and protection of water and marine resources
- transition to a circular economy – producing items by reusing, repairing, refurbishing, and recycling as much as possible
- pollution prevention control
- protection and restoration of biodiversity – the variety of animal and plant life in the world.
Sustainability Rating
Based on your preferences and your answers to the above questions you will fall into one of 3 categories.
Neutral
You don’t have a preference when it comes to sustainability and investing. Your attitude to risk is the main deciding factor when selecting funds to invest in.
Aware
The broader impact of your investment on the environment and society is important to you. Along with your attitude to risk, your preferences for sustainability would be a deciding factor when deciding what funds to invest in.
Focused
Both the broader impact on your investment on the environment and society and actively helping the transition to a more sustainable environment and society are your primary motivators. Along with your attitude to risk, your preference for sustainability would be a strong deciding factor when selecting funds to invest in.
Zurich Video on ESG Investing
Environmental, Social, and Governance FAQs
What is ESG in simple words?
Environmental, social, and governance (ESG) is a term used to represent an organization’s corporate financial interests that focus mainly on sustainable and ethical impacts. Capital markets use ESG to evaluate organizations and determine future financial performance
Is ESG a good investment?
Obviously, ESG investing is good for the planet we share and some studies have found that ESG investments can outperform conventional ones.
What are the 4 types of sustainability?
The four pillars of sustainability
- Human sustainability. Human sustainability aims to maintain and improve the human capital in society.
- Social sustainability.
- Economic sustainability.
- Environmental sustainability.
What are the 3 pillars of ESG?
The 3 Pillars of ESG. Successful businesses focus on three core essentials:
- people,
- process,
- and product
What are ESG risks?
ESG risks include those related to climate change impacts mitigation and adaptation, environmental management practices and duty of care, working and safety conditions, respect for human rights, anti-bribery and corruption practices, and compliance with relevant laws and regulations.
Why is ESG important to me?
Businesses with good ESG practices score higher in terms of reputation and carry less risk as they incorporate sustainability as their core value.
What qualifies as ESG investing?
ESG Investing (also known as “socially responsible investing,” “impact investing,” and “sustainable investing”) refers to investing which prioritises optimal environmental, social, and governance (ESG) factors or outcomes.
Does ESG investing do anything?
ESG investing may lower your risk. A Morgan Stanley study found that sustainable funds consistently showed a lower downside risk than traditional funds, regardless of the asset class
If you have questions or need advice on ESG Investing Donegal, call 074 9103938 or email now.
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