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The Monthly Review August 2019: Close Look

2 months ago

ESG: The virtous investment circle?

As wildfires burn in the Amazon and sea temperatures climb, President Macron has joined climate activists in claiming that ‘our house is burning’. Environmental harm presents both a challenge and an opportunity, for those hoping to invest wisely, but also make a difference. In response, the fund management industry has created socially responsible investment strategies. One such category is ESG or environmental, social and governance funds. We take a look at this highly topical sector.

The United Nations has identified 17 categories of sustainable investment, ranging from access to food, housing and healthcare, through to sustainable cities, and clean energy and water. These categories are used as broad guidelines for the ESG sector. Each fund management house will use their own ESG screen, when choosing companies to invest in. These screens look to identify strong and fairly valued companies that also meet the right criteria. And exclude companies that fail the tests, perhaps due to unfair working practices or a poor record on the environment.

Environmental is the easiest category to define. Climate has become a political hot potato, as demonstrated by strong results for the Green parties at the recent European elections.

Extreme weather events add fuel to the fire of the debate, as scientists try to pinpoint their cause. ESG screening can identify companies engaged in technologies, which could one day relieve environmental stress. While generally excluding companies which have negative impacts, such as pollution.

But climate is not the only story. The ESG sector maintains that social and governance issues are also key to a company’s sustainability. Social factors include education, gender equality and a decent working environment. Governance is a broader category. Analysis of a company looks at factors such as whether the board of directors is independent, the proportion of female board members and workers’ pay and conditions.

So ESG funds aim to be a force for good, by investing in companies that offer the best stewardship of their employees and of the planet. It’s small wonder that these funds appeal to the so-called millennials, who can now invest for their own future with a clear conscience. And the finance they provide could develop technologies that might just solve the burning issues of the day.

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