How ESG can support long-term goals
Updated: Dec 18, 2020
Investing that incorporates ESG (environmental, social and governance) factors in some way are rising. While there are ethical reasons for choosing ESG investments, they can support your long-term financial goals too.
Why investing should always focus on the long term
When we invest, it should always be with a long-term time frame, at least five years.
This is because investment markets often experience short-term volatility. While daily fluctuations can mean the value of investments can rise or fall, over time this should smooth out. If you look at investment performance over a month, you’ll notice many peaks and troughs. While these are still there when you look at performance over five years, there should be an upwards trend.
Trying to time the market to buy low and sell high is near impossible. There is a whole range of factors that will influence the value of an investment, some of which you won’t be able to predict.
As a result, a buy and hold strategy is often most appropriate for the average investor. This means you purchase investments, with your risk profile in mind, with the view that you will hold them over the long term. Your portfolio should be balanced so that when one area experiences a fall, there is an opportunity that another will rise to balance this out.
A buy and hold strategy doesn’t mean you never make changes to your investment portfolio. But that when you do, it’s carefully considered and reflects your wider financial plans, rather than the short-term movements of the market.
Therefore, when you start thinking about investing, it’s important you do so with long-term goals in mind. This may be to create a nest egg for young children when they reach adulthood, or for your retirement that could still be several decades away. With interest rates low, it can be tempting to invest to achieve a short-term goal. However, should markets experience volatility during this period, you’re more likely to lose money as you won’t have as long for markets to recover.
Why ESG supports long-term outlooks
So, how does incorporating ESG factors support your long-term goals?
The process of ESG investing involves taking a closer look at how a company operates across three different criteria. This may include:
Environmental: Resource use, ecological footprint, and impact on climate change
Social: Community impact, labour standards, and customer responsibility
Governance: Shareholder rights, risk management, and tax transparency
These areas will affect how a company operates, impacting its long-term profitability. For instance, a company that scores poorly in customer responsibility could be at risk of losing customers and business as a direct result of its practice. Or a firm with high carbon emissions could find they face significant penalties in the future as governments take climate action.
As a result, ESG criteria can help investors understand long-term risk management. A firm with strong corporate governance is often in the best interests of long-term shareholders. As mentioned above, you should invest with a long-term time frame, so looking at how a business operates and responds to challenges can add value.
Alongside the traditional information you use to make investment decisions, such as risk profile and diversity of the portfolio, ESG criteria can help you invest for the long term.
Of course, there are no guarantees when investing. The value of ESG investments can still fall, so it’s important you keep the usual investment principles in mind and expect short-term volatility at times. It’s also important to note that there isn’t a standard way to report ESG matters yet, as a result, the information provided can vary widely between different investment opportunities.
How to make ESG part of your investment portfolio
Making ESG part of your investment portfolio can seem complex. ESG spans many different areas and there are different strategies for incorporating ESG issues into your portfolio. While there is a growing range of ESG funds you can invest through, the criteria for these can vary widely, and it’s still important to ensure the investment approach aligns with your long-term aspirations.
However, we can work with you to build an investment portfolio that combines your financial situation, goals, and ESG criteria with a long-term outlook. Please contact us if you’d like to review your current investments with ESG in mind or have some money you’d like to invest.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.