ESG investing can help your charity expand its budget – without supporting companies that go against your mission statement and values.
Introduction
Charitable investments can be vital for the long-term sustainability of your charity; especially in the current economic landscape when donations may have decreased. As a charity, however, it is important that your portfolio aligns with your objectives. Environmental, Social, and Governance (ESG) factors are increasingly becoming a powerful tool for those looking to invest responsibly.
This article aims to dispel common misconceptions about ESG stocks and explore their ethical implications alongside their financial benefits. Through ESG investing, your organisation could use its funds to not just expand its budget but to also make a difference.
What is ESG investing?
ESG investing evaluates a company’s performance across three key areas:
- Environmental: the company’s impact on the natural world. This includes its carbon footprint, resource usage, and environmental management practices.
- Social: the company’s relationship with people. This includes its treatment of employees and customers with a focus on issues such as diversity, labour practices, and community engagement.
- Governance: the quality of the company’s leadership and board of directors, as well as its adherence to ethical standards and transparency.
Previously viewed as a niche investment strategy, ESG stocks have witnessed a surge in popularity in recent years. This can be attributed to more demand from investors for ethical and sustainable options – traits that your charity likely wishes to emulate.[1] As more of the population seeks ways to mitigate their contributions towards climate change and social inequality, ESG investing has emerged as a viable litmus test.
The ethical benefits of ESG investing
Charities, by nature, have a commitment to social good and ethical conduct and they exist for the public benefit. Your organisation has a responsibility to ensure that your actions align with your mission. You may not wish to cause harm with your investment practices; however, you may inadvertently be supporting groups which oppose your values when you do not look at the underlying assets.
Filtering a portfolio through ESG criteria offers your charity the opportunity to extend its impact beyond your normal efforts and into the realm of finance. You can filter your investment choices through a set of ESG criteria, which means your investment can help deliver a benefit to the wider world and encourage other companies to commit to good ESG practices.
Furthermore, accounting for ESG factors could help you avoid risks to your reputation and make your donors more confident that they are supporting the right cause. Your organisation could use ESG portfolios to demonstrate its dedication to prudent financial management and driving positive change.
The financial benefits of ESG investing
A misconception about ESG investing is that it is less profitable than traditional strategies. According to The Economic Times, however, there is no trade-off between sustainable funds and achieving returns.[2] In fact, companies that proactively embrace ESG principles tend to outperform their peers in every major performance metric including 19% higher revenue and three times stronger employee retention.[3]
As a not-for-profit venture, your organisation is likely to want stability as well as good financial performance. A 2022 study found that ESG portfolios also seem to be “relatively less turbulent” when compared to the market benchmark.[4]
A reason for this could be that the businesses with the best ESG scores are more adept at considering the long-term challenges and regulation changes that could affect their operations. Companies that abstain from ESG criteria open themselves up to environmental disasters, reputation scandals, and consumer boycotts – some of the latter may even be supported by your donation base.
As the demand for responsible investment options grows, an expanding range of ESG funds and products have emerged to meet it. From green bonds to impact-focused equity funds, charities now have an array of investment vehicles that can help further your objectives.
You may be worried about the additional costs associated with integrating ESG criteria; particularly if you are a smaller organisation, however, as the availability of ESG funds and research tools grows, the cost gap has closed, making ESG investing more affordable.
How can we help you?
While the future of ESG investing appears promising, it can also be complex.
Legislation concerning the strategy is rapidly evolving as regulatory bodies begin to recognise the importance of sustainable finance. It is critical that your organisation stays informed about such developments. Our expert team can make sure that your portfolio is compliant with regulations while also delivering value.
As independent financial planners, we have access to the whole market and can recommend the best ESG solutions for you, helping support your charities mission rather than conflict with them.
Why not invest in your charity’s future and get in touch with one of our team?
If you wish to discuss your options, or review your existing arrangements, please contact us. We provide a 10 per cent discount on our initial fees for members of NCVO.
To arrange an initial no cost, no obligation, consultation, then please fill out the contact form below. Alternatively, you can call 01603 706 820 or email info@lffp.co.uk.
Sources
[1] Michelson, J. (2022) ESG investing is ‘soaring.’ what does it mean?, Forbes. Available at: https://www.forbes.com/sites/joanmichelson2/2022/11/18/esg-investing-is-soaring-what-does-it-mean/ (Accessed: 10 April 2024).
[2] Sidhavelayutham, M. (2023) Risk vs return in ESG Investments – is there really a trade-off?, The Economic Times. Available at: https://economictimes.indiatimes.com/markets/stocks/news/risk-vs-return-in-esg-investments-is-there-really-a-trade-off/articleshow/104260178.cms?from=mdr (Accessed: 10 April 2024).
[3] Pollard, J. (2023) ESG can lead to higher profitability, Forbes. Available at: https://www.forbes.com/sites/joshuapollard/2023/07/18/esg-can-lead-to-higher-profitability/ (Accessed: 10 April 2024).
[4] Ouchen, A. (2021) ‘Is the ESG portfolio less turbulent than a market benchmark portfolio?’, Risk Management, 24(1), pp. 1–33. doi:10.1057/s41283-021-00077-4.
Important information
This is solely for informational purposes and nothing in it is intended to constitute advice or a recommendation. You should not make any investment decisions based on this content. The value of investments can fall as well as rise and you may not get back the amount you originally invested.
While considerable care has been taken to ensure this information is accurate and up-to-date, no warranty is given as to its accuracy. This article constitutes a financial promotion.
