Now reading:

What is ESG investing?

What is ESG investing?

  • 06 March 2024
  • By Fidelity International
  • 5 mins read

ESG investing is the consideration of environmental, social and governance (ESG) factors, alongside financial factors, in the investment decision-making process.

Different labels like sustainable investing, socially responsible investing, ethical investing and impact investing all form part of ESG investing, with ESG factors covering an extremely broad range of issues - from avoiding investing in tobacco companies to financing clean water initiatives.

Factors impacting ESG investingSource: Fidelity International, PRI, 2018. For illustration purposes only.  

The concepts underpinning ESG have evolved over time.

While a hundred years ago, responsible investing was mostly about religious beliefs influencing the choice of investments, it’s now about people’s perceptions of themselves and their role in society informing their investment framework.

ESG investing’s beginnings were largely based on exclusion - avoiding the asset classes and sectors deemed to have a negative effect on society - however in recent years it has extended to modern-day activism, where investors directly intervene to enact positive change.

Today, ESG is considered by some as an asset class and an investment approach in its own right.

Investor motivations for pursuing ESG vary widely, ranging from the already mentioned moral and religious beliefs, to regulatory and legislative requirements, public and client pressure, and economic reasons.

Why does ESG matter?

There are two broad schools of thought when it comes to why ESG matters; one starts from the role of investors in society and the other focuses on risk management.

Many investor groups including pension funds, charities and endowment funds, see their role as more than just return-seekers. They are conscious that funding our retirements, financing societal initiatives and contributing to the cost of education, can give them a function within wider society.

With this responsibility comes influence. These investor groups manage significant pools of capital; directing this capital gives them a substantial amount of authority. They decide how and where they want their funds allocated, and can choose to favour investments that aim not to have a negative effect on society, or those targeting a positive effect.

The other major philosophy behind ESG is rooted in risk management.

Investors who take this approach incorporate ESG factors into their investment process to help mitigate risk. For example, a potential investment in a company with low ESG standards could expose the portfolio to a variety of risks faced by the company in the future, such as worker strikes, litigation and negative publicity, resulting in lower future returns. For investors, monitoring the ESG credentials of an investment can lead to better risk-based judgements.

This is not a divergence from the traditional investment principle of maximising shareholder value - it’s an evolution.

In the early 2000s, there were some debates over whether the fiduciary duty of asset managers included considering non-investment related indicators such as ESG characteristics. A large body of research since has led to an overwhelming consensus that ESG factors do indeed play a part in the performance of investments. By considering ESG, investors may be able to deliver better risk-adjusted returns.

The factors driving ESG

The primary driver of the growing focus on ESG is access to information.

The proliferation of 24-hour news channels, the internet and social media mean that the public has an extraordinary amount of information available at its fingertips. It’s not only an instant news world, but it’s also a global news world - we can find out rapidly what is happening almost anywhere in the world.

Armed with this transparency, public scrutiny is at an all-time high, and people power is changing how the investment world behaves. Companies understand the value of their brand and have a heightened sensitivity to public opinion to avoid risking damage to their reputation.

This public scrutiny affects how institutional investors direct their capital, which in turn influences how asset managers deploy funds and engage with companies.

While the relationship between institutional investors, asset managers and companies isn’t one way, they often have long-term partnerships, influencing and informing each other.

So in practice, the drive towards ESG can come from institutions, asset managers and industry.

An important aspect of the increasing access to information is the availability of data. This has made it practical to incorporate ESG factors into the investment process.

Regulatory frameworks have improved, companies disclose more ESG information, ESG investment metrics and tools are proliferating, independent third-party agencies provide ESG ratings, and new ESG indices allow for portfolio benchmarking. And an increasing body of research explains how to incorporate ESG factors into decision making.

Important information

  1. The content above is written by Fidelity International.
  2. Oversea-Chinese Banking Corporation Limited (“OCBC Bank”, “us”, “we” or “our”) is not responsible for the contents of articles written by third parties. Any opinions or views of third parties expressed in this document are those of the third parties identified, and do not represent views of OCBC Bank.
  3. This information is intended for general circulation and / or discussion purposes only. It does not consider the specific investment objectives, financial situation or needs of any particular person.
  4. Before you make an investment, please seek advice from your Relationship Manager regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs.
  5. If you choose not to do so, you should consider if the investment product is suitable for you and conduct your own assessments and due diligence on the investment product.
  6. We are not making an offer, solicit to buy or sell or subscribe for any security or financial instrument, enter into any transaction or participate in any trading or investment strategy with you through this document. Nothing in this document shall be deemed as an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into any transaction or to participate in any particular trading or investment strategy.
  7. No representation or warranty whatsoever in respect of any information provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice.
  8. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein.
  9. Investments are subject to investment risks, including the possible loss of the principal amount invested. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures, predictions or projections are not necessarily indicative of future or likely performance.
  10. Any reference to a company, financial product or asset class is used for illustrative purposes and does not represent our recommendation in any way.
  11. The information in and contents of this document may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.
  12. OCBC Bank, its related companies, and their respective directors and/or employees (collectively “Related Persons”) may, or might have in the future, interests in the investment products or the issuers mentioned herein. Such interests include effecting transactions in such investment products, and providing broking, investment banking and other financial services to such issuers. OCBC Bank and its Related Persons may also be related to, and receive fees from, providers of such investment products.
  13. You must read the Offer Document/Indicative Term Sheet/Product Highlight Sheet before deciding whether or not to purchase the investment product, copies of which may be obtained from your relationship manager.
  14. Any hyperlink to any third party article, or other website or webpage (including any websites or webpages owned, operated and maintained by third parties) is for informational purposes only and for your convenience only and is not an endorsement or verification of any such article, website or webpage by OCBC Bank and should only be accessed at your own risk. OCBC Bank does not review the contents of any such articles, website or webpage, and shall not be liable to any person for the same.
  15. Investors should note that there are necessarily limitations and difficulties in using any graph, chart, formula or other device to determine whether or not, or if so, when to, make an investment.
  16. Where the contents have not been identified as summaries of the investment ideas and recommendations set out in research reports disseminated by the OCBC Group, the information is not intended to constitute research analysis or recommendation and should not be treated as such.