What does ESG investing mean?
- Robin Powell
- Feb 10
- 3 min read
ESG investing has become a major theme in recent years. The initials stand for Environmental, Social, and Governance, but the term covers a wide range of issues and strategies.
For JASPREET DUHRA from S&P Dow Jones Indices, ESG is about understanding how companies manage long-term risks that are not always financial but still critical to performance.
There are many different approaches to ESG, and not all are created equal. It’s important to understand what you are really investing in.
KEY TAKEAWAYS
1. ESG is a broad and complex concept
ESG covers everything from climate and biodiversity to board independence and anti-corruption policies. While the term is simple, the implementation can be highly detailed and vary between funds.
2. ESG investing doesn’t require active funds
ESG index funds provide a lower-cost way to invest sustainably. They follow transparent, rules-based methods and often include ongoing monitoring to ensure companies continue to meet ESG criteria.
3. Greenwashing is a real risk
Some funds may claim to be sustainable without providing the evidence to support it. Regulators are starting to act, but investors should remain cautious and look for clearly defined ESG methodologies.
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TRANSCRIPT
Robin Powell: A type of investing that has really come to the fore in recent years is ESG investing.
ESG stands for Environmental, Social and Governance. So what exactly does it mean?
Jaspreet Duhra: Broadly what we’re talking about is trying to understand how a company is managing its environmental, societal, and governance challenges.
Underneath that are potentially hundreds of sub-topics – so environmental could be climate, biodiversity; social could be human rights, labour rights; governance: what’s the independence like of the board? Have they got bribery and corruption procedures in place?
So, on one level it’s quite a simple term environmental, social, governance: ESG but it can get very complex very quickly, and you have all sorts of investment styles that can sit underneath that.
RP: The impression we’re often given in the financial media is that, to invest in a sustainable way, you have to use an actively managed fund.
But it’s not true. If you can invest in an ESG index fund, the fees and charges you pay will be much lower.
JD: An ESG index is very similar to a mainstream index in the sense that it’s a rules-based, transparent approach to investing with this added layer of ESG.
And that ESG can be very different things to different investors: so, it can be a simple exclusionary approach, it can be more complex approaches such as things like net zero, aligning with 1.5 degrees going forward. The key thing with an index is that we have to explain very clearly the approach that we take in creating such indices.
We have to use very credible research, and the research piece is hugely important in an ESG index; and explaining the fact that these indices are not standing still. It’s not a case of: you’re in an index, and you’re comfortable as a company.
There are requirements to keep monitoring those companies to make sure they are still strong from an ESG perspective.
RP: A complicating factor for ESG investors is so-called greenwashing. A fund can claim to be sustainable or ethical, but its actions might tell a different story.
JD: As we see more interest in ESG, there are more and more fund managers who want to get into the space. So there might be a temptation to label a fund as being ESG, or being green, and then not being able to substantiate that with the information that’s sitting underneath it.
That’s a concern that many regulators have at the moment: you see a lot of that in the press. The EU are certainly trying to deal with what they consider to be a greenwashing issue, where funds are being labelled as green but there’s then maybe not the substance behind it.
Green can be a plethora of things to different people, so how do you make funds easily available to the market, where it’s clear to investors what is sitting underneath the fund and, really importantly, how comparable they are to other green funds?
RP: As Jaspreet Duhra has explained, ESG is a complex subject.
If you want to invest sustainably, it’s best to use a financial adviser who really understands it. Not all advisers do.
