ESG criteria: thinking more deeply about your investments.

Increasingly we find people are interested in their investments beyond their financial return.They want to know more about the nature of the companies and organisations they’re investing in: are they good ‘corporate citizens’ with a good track record in environmental, social and governance concerns?It’s a question we’re asked about a lot – so we thought it’s worthy of a post here.Let’s start with a definition: Environmental, Social and Governance (ESG) Criteria*ESG criteria screen investments against:

• Environmental criteria considers how a company performs as a steward of the natural environment.
• Social criteria look at a company’s relationships with employees, suppliers, customers and their local community.
• Governance criteria are concerned with a company’s performance regarding leadership, executive pay, audits and internal controls, and shareholder rights.

The investment pathway we recommend for each of our clients is customised to their situation and goals, and takes into account a range of factors. Apart from considering each client’s investment timeframe, goals and appetite for risk, where ESG criteria are of interest, we factor that in to the recommendations we make regarding their investment portfolio. 5 Financial regularly reviews investment offerings from a wide range of providers. We scrutinise each investment across a variety of indicators, and through this process, we have access to a number of investment options that filter for performance against ESG criteria.One of our investment partners – Vanguard – has recently released a statement on the related topic of investment stewardship.It also includes an open letter addressed to the directors of public companies worldwide that Vanguard investors may be interested to read.The letter from Vanguard's Chairman & CEO, Bill McNabb, remarks upon Vanguard’s long-term perspective: “At Vanguard, a long-term perspective informs every aspect of our investment approach, from the way we manage our funds to the advice we give our investors. Our index funds are structurally long-term, holding their investments almost indefinitely. And our active equity managers—who invest nearly $500 billion on our clients’ behalf—are behaviorally long-term, with most holding their positions longer than peer averages. The typical dollar invested with Vanguard stays for more than ten years.”It concludes with the comment that this long term approach to investing makes Vanguard “…essentially permanent owners…” of these global companies. It could be argued that with substantial buying power and proxy voting rights, Vanguard has the ability to influence and shape key decisions. McNabb cites climate risk and gender diversity as areas of interest in Vanguard’s stewardship efforts.ESG is a big topic and it’s one we’re sure to see more and more investment managers actively address.If you would like to know more about our approach to ESG investing, don’t hesitate to contact us.*Definition of ESG from Investopedia