What is ESG investing?

Environmental, social and governance investing – or ‘ESG’ investing – comes in different shapes and sizes.

Some investors choose companies that not only meet their financial standards, but also match a clear set of non-financial measures. These might include the company’s culture, the diversity of the leadership team, and the firm’s impact on the environment.

What the company does is also important – ESG investors often want to avoid putting their money into firms that engage in controversial, unethical, or environmentally harmful practices.

Here we look at everything you might want to know about ESG investing, including what it means, how it works, and how it’s measured.

The socially responsible portfolios available at John Lewis Investments lean towards companies and bond issuers that have high ESG standards. Your money is invested in exchange-traded funds (or ETFs) that aim to limit exposure to companies engaged in controversial activities, while focusing on those that pay attention to ESG principles.

ESG funds contain companies that have been selected because they meet a clear set of environmental, social and governance standards. Companies selected are monitored to make sure that they maintain these standards consistently over time.

There are several benefits to ESG investing. It’s one way of investing in the long-term trends that could shape our future.

For some investors, it is an opportunity to align their investments with the changes they would like to see in the world. For instance, some ESG funds can encourage companies to change the way they behave. That’s because investors are shareholders, and together, they can lobby companies to improve their environmental, social, or governmental practices.

For others, ESG is a way of managing risk and maximising the potential for future returns. By choosing funds which include companies that could flourish in the future global economy, and avoiding those that they think will eventually dwindle or fall out of favour, they’re seeking a sustainable way to grow their wealth in the decades to come.

Some of the environmental issues firms can be scored against include:

Pollution

Deforestation

Climate change

Waste disposal

Carbon emissions

Green energy initiatives

Energy-efficient measures

Treatment of animals

Social factors focus on a company’s relationship to people inside and outside the organisation, and can include the following:

Employee working conditions

Health and safety

Engagement and volunteering in the local community

Diversity including the percentage of women in leadership

How a company operates, including the pay of executives and how leaders are selected, falls under the governance category. Investors can score companies based on the following:

Leadership diversity

Accountability to shareholders

Accurate and transparent accounting

Bribery, corruption, or anything illegal is not taking place

ESG scores inform investment decision-making and the monitoring of ESG investments.

MSCI, which is among the world’s biggest investment research and financial index businesses, provides one of the largest standardised frameworks for assessing ESG factors. We use it to show you how your portfolio scores against a broad set of ESG criteria. The data is compiled by over 250 global experts, and it’s recognised as a gold-standard data provider.

A portfolio is given an overall ESG score to show how companies manage key risks and opportunities which arise from environmental, social, and governance factors. Separate scores for each category are also given to help investors have a clear picture of the company or companies in question.

Our investment team uses this data along with its own expertise to build and monitor our socially responsible portfolios and rebalance them when needed to make sure they stay within their risk profile.

All of the John Lewis Investments portfolios receive an ESG rating so you can see the impact of your investments – whichever style you choose.

With ESG investing, it’s important to balance social responsibility and investment returns.

That’s why our socially responsible portfolios offer you the best possible access to ESG themes while ensuring that you don’t have to compromise on your investment goals.

It’s often not appropriate to compare the performance of socially responsible portfolios against that of the fully managed portfolios, because their aims and holdings are different.

With that in mind, the performance of our socially responsible portfolios is compared against a simulated ‘equivalent non-ESG portfolio’. This simulated example holds similar sized assets to those in the ESG funds. View the performance of our socially responsible portfolios – but remember that past performance is not a guide to future returns.

There are different kinds of responsible investing, and they all have different aims and names.

‘Sustainable’ investing will often have a greater focus on the environment, while with ‘ESG’ investing, companies are screened based on strict criteria relating to their environmental, social and governance policies.

To make things more straightforward, at John Lewis Investments, we use the term socially responsible investing (SRI) to describe how we work to limit exposure to companies that engage in controversial activities while increasing exposure to companies that lead their peers in social responsibility.

As with all investing, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may change in the future.

For more information, read our terms and conditions.