What is ESG?
Many investors want to know how their investments affect the environment and society, and how the companies they invest in are run. “ESG” is a handy acronym that has been created to discuss these concerns, with the “E” standing for the environment, “S” for social, and “G” for governance.
Is ESG the same as sustainable investing?
Sustainable investing, responsible investing, ethical investing and many other terms are used to describe investing that’s not just about financial returns. These terms can all mean slightly different things, and sometimes the same term can mean different things to different people. The AIC has used the term ESG as it has become widely used within the investment industry and includes a broad range of issues that investors may be concerned about.
What ESG information can I find on the AIC’s website?
The AIC has invited every member investment company to disclose its ESG policy. Where a company has submitted its ESG policy to us, this can be found on the company’s information page under the “ESG” tab. If a company has not provided an ESG policy, no ESG tab will appear. We expect to add more ESG disclosures over time as more of our members provide them. We hope these disclosures will be useful to investors who want to make sure their personal values and beliefs are reflected in the companies they invest in.
What’s in the disclosures?
The disclosures are free-form; that means we have let every member company decide what information investors would find most useful. Most companies have described how ESG factors are incorporated into their investment process. Some have given details of how they try to influence the companies they invest in to have a more positive social or environmental impact (called “engagement”). Others have provided facts and figures about the investment company’s impact on the environment or society (such as carbon emissions). You can also find information about any agreements, codes or principles that investment companies may have signed up to, such as the UN Principles for Responsible Investment. Finally, some investment companies have given details of types of companies they avoid investing in for ESG reasons (called “exclusions” or “negative screening”).
Are investment companies good for ESG investing?
Some features of investment companies make them particularly suitable for ESG investing. They have a “closed-ended structure”, which means they do not have to sell assets when investors sell their shares in the investment company. This allows them to take a longer-term view of their investments and invest in assets that are hard to buy and sell such as physical property, infrastructure assets and start-up companies. Some of these investments can have positive social or environmental impacts. The fact that investment companies are governed by independent boards of directors, whose legal duty is to look after shareholders’ interests, helps ensure accountability, while their status as listed companies means they are transparent and need to meet high regulatory standards.
What is impact investing?
Impact investing is a type of investing that is focused on achieving measurable social or environmental impacts. Investment companies engaged in impact investing might invest in wind or solar farms to generate clean energy, energy efficiency projects, social housing or accommodation for the homeless. These assets are hard to buy and sell, so they are particularly suitable for investment companies, which can hold them for the long term. Investment companies that do impact investing will measure their impacts on the environment and/or society in various ways, and tend to report these impacts on a regular basis, so that investors can see the positive impacts their investments are making.
An introduction to ESG
What is ESG and how does it relate to investment companies?
“ESG starts from good governance. With their independent boards, investment companies offer a high level of transparency and accountability compared to other fund structures.”
Nick Britton, Head of Intermediary Communications at the AIC
Click on the terms below to see what they mean.
Using your rights as a shareholder to influence a company to behave more responsibly. These rights include being able to vote, raise questions at annual general meetings (AGMs) or even call an extraordinary general meeting (EGM).
Selecting investments based on their individual characteristics, rather than the region, sector or other category they may belong to.
A process through which an investor tries to influence a company that it invests in, generally to encourage the company to behave more responsibly.
Environmental, social and governance factors that investment companies may consider when investing.
Companies or sectors that an investment company does not and will not invest in.
A word that describes how companies are directed and controlled, and whether they have robust and proper procedures in place for making decisions. It encompasses fair treatment of their shareholders, setting appropriate levels of executive pay, managing and monitoring risks effectively, and being transparent and accountable.
A type of ESG investing that aims to achieve measurable positive social or environmental outcomes alongside financial returns.
Including ESG factors in an investment process, for example when selecting companies to invest in, rather than considering them separately.
Negative screening means excluding companies for ESG-related reasons. Positive screening means selecting companies because of their positive impact on the environment or society.
This can refer to environmental sustainability – how ‘green’ a company is – but it can also have a broader meaning, encompassing the company’s impact on its employees, the community and society. Those who seek to invest in sustainable businesses believe that they will do well in the long term because they have a positive effect on society and the environment.
A set of principles for asset managers expressing a commitment to investing in a responsible way that brings benefits to the economy, the environment and society while also creating long-term value for investors. Find out more about the UK Stewardship Code on the website of the Financial Reporting Council.
Six principles for responsible investing that many investment companies have signed up to. They include taking ESG factors into account when investing. Read more on the principles on the UN PRI’s website.
Latest articles & media
The latest ESG related articles, press releases & videos from the AIC
AIC welcomes FCA anti-greenwashing measures and labelling regime
The Association of Investment Companies (AIC) has commented on the new package of measures from the FCA to tackle greenwashing and help investors identify sustainability-focused funds.
ESG remains a “minefield” for advisers and wealth managers
91% recommend sustainable funds and 72% expect demand to increase. Less than a fifth of intermediaries trust ESG ratings.
ESG investing declining in popularity as fears of greenwashing grow
The popularity of ESG investing is declining since 2021, though a majority of private investors still say they consider ESG factors when investing.
Taking the fight to climate change
David Prosser looks at investment companies with a positive environmental impact.
Keystone Positive Change Investment Trust: Manager Insights
Baillie Gifford's Kate Fox, co-manager of Keystone Positive Change Investment Trust, explains the trust’s objectives, gives an update on the portfolio and discusses the outlook for company holdings. Capital at risk.
VCT managers still seeing strong investor appetite
Managers discuss fundraising, ESG and championing female founders.