Written by: Laura Hoy | Hargreaves Lansdown
- All investment strategies benefit from considering ESG factors to make informed investment decisions
- Excluding particular sectors is not the aim of ESG investing. A best-in-class approach can preserve diversification while keeping one eye on the future
- ESG factors can uncover potential risks and opportunities that would otherwise be missed
- ESG is more than just climate change. Social and Governance issues are often overlooked, but can play an important role in company performance
ESG investing comes with its fair share of challenges – from confusing terminology to the potential for greenwashing. But one thing’s for sure, all investors should be incorporating ESG factors into their analysis whether they consider themselves a green crusader or not. Investors incorporating ESG considerations are simply keeping their eyes are open to the trends influencing regulatory decisions, government policy, and public perception. Saying ESG should be ignored is akin to telling investors to disregard conventional metrics like price to earnings or free cash flow.
Using ESG metrics is a good way to identify sustainable businesses. Like any other financial data point, they’re best used in an apples-to-apples comparison. Oil and gas stocks and those in the tech industry can’t be compared on a P/E basis. ESG metrics work the same way. Using ESG in this way should help investors preserve diversification without ignoring underlying shifts in public policy and perception.
Tesla’s a great example of how ESG ratings can uncover opportunities and threats within a particular company. Years ago, Tesla’s commitment to electric meant it’s ESG credentials outshined most peers. This reflected the group’s decision to jump on the EV revolution early. But now that peers have caught up, the group’s sunk to the bottom of the pack. Social and governance issues are now weighing on the group’s ESG credentials. Concerns about working conditions, metals mining and governance issues mean failings in the E, the S and the G. These are all risks that should be carefully considered before investing.