Making money through ESG investing

If you were given discount for clothes because they were made by under-age children in some Asian sweatshop, would you be happy to take it?
Peter McGahan

LAST week’s column on Environmental, Social and Governance (ESG) investing has significantly more gravitas when we consider the comments from Fatih Birol.

The executive director of the International Energy Agency has openly declared the world has just six months in which to change the course of the climate crisis, just as governments pump over £7 trillion in to economies to kick start them.

Over lockdown, we have seen extraordinary resourcefulness from companies who moved to allow staff to work from home. The peace and quiet has proven to be more beneficial to staff efficiency.

It is natural that such a move will take away demand for large commercial properties, and the resulting drop in carbon emissions from commuting can only be good.

The enablers to efficient home working (technology/training) will see significant surges in their share prices whilst this new world settles in.

Naturally, I don’t subscribe to the point of view that society will move to fully working from home. It just won’t happen.

Physiologically, we need to know we are at work or at home. The divide is important for our mental well-being. Furthermore, our given psychological needs will not be met, ie the need for attention (to give and receive), the need to be part of a wider community, position in society, let alone the ability to be face to face for practical training, to read body language in meetings. Let us see.

Ethical investing was linked with poor performance but that has changed with ethical indices outperforming their non-ethical counterparts over five years.

There is a change/power shift away from the monopolised organisations into those we trust. Asking a large organisation to even return a call or email now is a chore. There is no accountability when you call back. In many ways, it’s like staying at a chain hotel versus a guesthouse. One cares because they need you and are accountable, the other is not bothered.

ESG is changing that. ESG funds target sustainable companies that have quality strong governance standards who minimise their impact on the environment. Those that do not, by definition aren’t likely to be around in the future anyhow.

In the long run, our planet is better served with less unnecessary consumption, lower carbon energy, equality, and growth that includes the 99.99 per cent more than the 0.01 per cent it currently serves.

Investing sustainably has lower profit margins initially e.g. there can often be an extra cost to manufacturing a product/garment outside of a so called ‘sweatshop’ or inappropriate labour market but that has to change.

Put it another way, if you were given discount for clothes because they were made by under-age children, would you be happy to take the discount?

In the medium to longer term, this movement will see investors avoid large expenses against a business such as labour disputes, pollution fines, shareholder revolts and the inevitable press that goes with all of this.

Which is most important? The E, S or G? In the short term, detailed studies show that Governance has the biggest impact on returns but in the long run environmental and social issues contributed more. The fact is, they all matter.

When a researcher is negative, screening it can naturally reduce returns. Research into companies is more than complicated because, whilst they might tick an E, or S box, they fall down on one part of the G.

Positive screening (looking for good examples of ESG policies) is more preferable to investment performance.

Toyota or Tesla as a sustainable investment?

Of the one million carbon mitigation patents registered up to last year, those organisations with large budgets and resources led the way, far in excess of the expected nimble fleet of foot you might have expected.

Whilst Tesla look and appear from a brand to be very green (ie their green revenue is near five times Toyota), Toyota’s low carbon patents is over 9,000 more than Tesla.

As such, companies move to responsible sustainable processes, that momentum will only surge.

Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. Ask any financial question to Peter at 028 6863 2692, email or visit

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