AAB Wealth: a greener financial future with an ESG focus

Choosing environmental, social and governance funds means your investments can support a more sustainable world, says Richard Johnston of AAB Wealth

Discover how your investments can support a more sustainable world

Do you recall at the start of the very first UK lockdown in March 2020, when we all became aware of the positive impact it was having on the environment

The clear water in the canals of Venice, the blue skies over Delhi and the sound of birdsong, loud and proud, in even the most urban of environments, including in Scotland’s cities?

This made many people think a lot more about our impact on the planet and how we might do more to protect it.

Richard Johnston is a chartered financial planner at AAB Wealth

But many of us might already feel as if we’re trying our best – we’re recycling our waste, using energy-efficient bulbs and shopping locally. What else could we do?

What if we said you could make sustainable choices through your investments?

It is true, pension funds do not usually appear in the same article as saving polar bears or why we should worry about bushfires in Australian, but all that could be about to change.

Under a new directive, financial advisors will be offering clients more environmental, social and governance (ESG) fund choices.

ESG investing means choosing to put your money in companies which score highly on their commitments towards environmental and societal responsibility.

The criteria are decided by research groups or independent companies, which provide a handy metric to compare different investments.

Here are the three components used to evaluate companies:

- Environmental: what impact does the business have on the environment? A number of important factors are taken into account, such as carbon footprint, fossil fuels, toxic chemicals and much more.

- Social: this addresses the social impact the business has both internally and in the broader community. Social factors include everything from gender equality and racial diversity to treatment of employees to ethical supply chain sourcing.

- Governance: the corporate governance component refers to how a company’s board of directors is driving positive change. This encompasses many internal issues regarding equal pay, diversity and how the leaders of the company interact with shareholders.

This is all great for the halo, but what you might well wonder about is actual performance?

What if we told you there is evidence to suggest that socially responsible investing could offer performance advantages?

Ten years ago, if you had wanted your investments to support good causes and facilitate change for the better, you would have had to make some compromises with your returns. Profitability was limited, risk was higher and investment diversification was sparse.

But the world has changed. Businesses that strive to make the world a better place now operate on a more level playing field, where investors no longer have to make that torrid tussle between their morals and their capitalistic endeavours.

This means you can now blend profit with philanthropy in your portfolio and fund businesses whose support for initiatives are closest to your heart.

But you might be wondering whether any of this has the potential to drive significant change?

The short answer is yes. Earlier this year it became a mandatory requirement for all advice firms to present clients with a palette of ESG investment options.

Being part of this collective move to become more responsible investors is more likely to help facilitate widespread change, although ESG is currently in its infancy so we can’t expect those clear canals of Venice to become a permanent feature just yet.

It may be a long road, but we believe the destination will be worth it. And it certainly makes this an exciting time for investors who want to make a difference.