Welcome back to Yielders’ latest blog, where this week we’ll be giving an introduction to ESG investing. This series is designed to give you insight into the latest topics across investing, the economy and personal finance. Check out some of our other blogs today!
What are ESG criteria?
‘ESG’ is an acronym that describes a method of screening of products or company practices to determine how well they perform at the Environmental, Social and Governance levels. As it stands, there are no hard-and-fast rules which determine whether something qualifies as an ESG investment, however it provides a guide to work towards if a provider wishes to appeal to the more socially and environmentally conscious consumer.
|Factor||Examples of Qualifying Policy|
|Environmental||Carbon tracking, water usage, recycling targets, energy usage, protective insurance policies|
|Social||Data protection policies, social impact screening, non-discrimination policy|
|Governance||Board composition, internal/ external audit, diffuse control, anti-bribery policy|
The above represent just a few considerations for each of the three areas of focus, however they help to illustrate that ESG is a very broad set of principles, and a lot can be considered as counting towards implementing the principles in a given organisation or product.
When and Why Did ESG Investing Come About?
ESG investing has its roots in what was known as ‘socially responsible investing’, which started to emerge in the 1960s. Many participating in financial markets wanted to avoid financially supporting certain industries such as those producing weapons, or political movements such as the apartheid in South Africa. This screening process was important for investors who wanted to consider more than just the absolute return on their investment, and has now morphed into a movement concerned with contemporary issues such as climate risks and global inequality.
How Does ESG Tie in with Islamic Finance and Fintech?
Looking at the two sectors closely, there is plenty of overlap between the two, though they are not synonymous. The Shariah makes special emphasis on aspects such as environmental stewardship, social protection and protection of parties involved in a transaction, principles which are baked into Islamic financial practices. In short, you will find investors conscious of the impact of their investments across both ESG and Shariah-based investing classes.
The Growth of ESG Offerings and the Growth of the Socially Conscious Investor Class
The development of our capacity to track indices and performance through data has led to an explosion in ESG investment products offered to the market. Innovations in data analytics and blockchain allow for more credibility in ESG investing, making claims about products and internal processes more auditable than ever before. There is growing evidence that investors from younger, more socially conscious demographics are starting to demand more from their investments; it appears that ESG looks to fill this gap.
Shareholder Activism and ESG Targets
As of late, there has been a significant trend towards what’s known as shareholder activism within companies, whereby shareholders attempt to compel company management to adopt more socially and environmentally responsible practices. A notable recent case involved a group of shareholders in Royal Dutch Shell, the multinational oil and gas company, which managed to compel nearly 15% of its investors to vote for its resolution to set stricter climate targets. While this is unlikely to change the company’s environmental policies overnight, it can be seen as an indication of the growing shift towards demanding more accountability, especially seeing as the company stakes its profits on the production of hydrocarbon products.
Yielders and ESG
Here at Yielders, we are acutely aware of not only the need to move towards an ESG-friendly framework, but also to provide our investors opportunities that they can feel good about. Due to the Shariah basis of our investment products, we already incorporate a number of socially beneficial and governance-intensive processes within the standard investment cycle. This includes equal voting rights among shareholders; signing long term leases with housing associations and charities; and in-depth screening of energy performance of an asset pre-acquisition.
That said, we are not keen to rest on our laurels, and after an extensive internal consultation, we are pleased to announce that we are undertaking a full internal ESG audit for 2021 and beyond. We envisage a model where our products can maximise the benefit for all stakeholders; something for which ESG has become a go-to model. We plan to spend the next year analysing where we can have the most impact in order to maximise our ESG credentials, whether it relates to our investments, our internal processes or our governance processes.
While we expect the audit itself to be a complex process, we kicked it off formally behind the scenes late last year by becoming a member of the RFI Foundation, a global group of like-minded companies committed to the advancement of the adoption of responsible finance. Their website can be found at rfi-foundation.org, where you can find more information about the movement towards a more responsible financial climate.
As with any investment, investing with Yielders means your capital is at risk.