What IS an ESG fund?

ESG stands for Environmental, Social and Governance and, when discussing investment, is primarily used to describe companies for whom these factors are a priority. ESG funds are investment portfolios which comprise companies who conduct business with sustainability and ESG factors in mind. Although initially a fairly rare entity in the investment world, there is increasing evidence to suggest that integrating ESG factors into investment analysis and the construction of portfolios can actually help boost long-term performance.

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ESGs first came onto the investment scene in the 1950s and 60s and were largely the creation of various Trade Unions. Two of the first were the International Brotherhood of Electrical Workers and the United Mine Workers who invested their considerable capital in affordable housing and health facilities respectively. The power of thoughtfully-invested capital for social change was not truly felt, however, until 1971, when a board member of General Motors drew up a Code of Conduct for practising business with apartheid-era South Africa. So many companies failed to comply with this code of conduct, that it resulted in a mass disinvestment from South African companies, a movement which greatly contributed to the end of apartheid.

 

In spite of this, the generally-held idea until the late-80s was that social responsibility was wont to have an adverse effect on a firm’s financial performance. Nowadays, however, many believe that ESG factors can actually be used to help identify businesses with superior business models, offering portfolio managers additional insight into the quality of a company’s management, risk profile, and culture.

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ESG takes into account a range of environmental concerns – such as climate change, nuclear energy, and sustainability – social concerns – such as consumer protection, human rights, diversity, and animal welfare – and corporate governance concerns, including management structure, employee relations, and executive compensation. These three factors are inextricably linked to the concept of responsible investment, which uses various methods to control the placing of investments. These include positive selection, integration, and activism.

To learn more about ESG funds – or to find out about the ESG international equity investment products that are available through Henry James International Management – get in touch via telephone on (646) 722-2739 or email at info@hj-intl.com and tune in to next week’s blog.