What is ESG? - YouTube

Welcome to the Morningstar Investment Board. I'm  Holly Black. Today, we are talking ESG. ESG is  

getting an awful lot of attention in the investing  world at the moment, increasingly popular way for  

people to invest, but really confusing. Why is it  confusing? Because it's got so many names and so  

many different ways that we refer to it and it's  all very personal how we think about these things.  

So, it can be called ethical investing,  sustainable investing, SRI, green, impact.  

It is no wonder that most people end up looking  a bit like this chap when they are trying to work  

out if ESG is for them. Their legs shrink, their  head gets massive. It's all quite terrifying.

But ESG is actually really simple.  So, all you need to think of it is  

environmental – how do companies treat  the planet; social – how do companies  

treat people; governance – how a company is  being run. A lot of people think ESG investing  

isn't for me. I just want to make the most money  possible. Maybe ESG investing isn't for you. But  

if you are at all interested in climate change,  equal pay for men and women or bribery and  

corruption at companies or modern slavery,  then ESG investing is for you because this is  

all of those things. And you can still make  profits from it. We're now seeing increasing  

amounts of evidence that investing in this  way doesn't mean compromising your returns.

So, how does it work? We need to think about –  let's think about some different companies that  

are listed on the FTSE as an example. So, we've  got Ocado, Aviva, Just Eat, British American  

Tobacco, HSBC, GlaxoSmithKline, trying to remember  which I wanted on my list, Rio Tinto, Barratt,  

that's a house developer, Diageo. Is that about  10? Always works better with even numbers.  

So, if we have that list of companies, ESG  investing just means picking and choosing  

which ones align with our personal values.  So, a few ways you could go about this.

You could screen negatively. Now, that means  leaving out things you don't want to invest in.  

Maybe you really don't – you're worried  about climate change, you don't want to  

invest in any companies that have anything  to do with fossil fuels. So, you'd go, well,  

I'm not going to invest in Rio, I'm not going to  invest in BP, which I forgot to write down here,  

and you'd look for a fund that invests  in that way and rule those companies out.  

Maybe you don't agree with tobacco and  alcohol. You can find a fund that rules out  

any company that makes a significant portion  of its revenues from those activities. So,  

that would probably be things like Ocado. That  would be Diageo because that brews drinks and  

it would definitely be British American  Tobacco because the clue is in the name.

But you don't have to just screen things out.  

More commonly, what funds now do is to look for  companies making a positive impact, and that's  

positive screening. I mean, it's really not  difficult stuff. So, you could look for companies  

that are members of the 30% club. So, that means  at least 30% of their board members are women,  

in which case, you would invest in Aviva, you  would invest in HSBC, you would invest in Barratt.  

You might look for companies that have been  shown by research to be working in line with  

the UN sustainability goals. If you wanted that,  you'd probably pick out Glaxo and Diageo. So,  

that is an example of how personal ESG investing  is, because the same person could rule out Diageo  

because they don't like alcohol and rule it  in because it's working towards the UN goals.

So, there are a few ways that we can invest  with ESG criteria in mind. You can pick out  

individual stocks in this way and that is  just researching companies that align with  

your goals that you think are working in  a way that you want them to. Morningstar  

has something called a Globe Rating, which is  

an indicator of how sustainable we think a fund or  a company is in comparison to its peer group. But  

if you don't want to do research yourself, you can  find a fund manager to do the hard work for you.  

That's getting easier. Around 25% of funds now  invest with some kind of ESG goals in mind.

There are a few different ways they go about  it. They get more stringent as you go. So,  

you could have an ESG consideration fund which  is – where it's not the main aim of the fund,  

but they do like to bear these things in  mind and probably avoid the worst of the  

worst companies that are doing very dirty  things. You could have an ESG-focused fund,  

which as the name suggests, is more  focused, has some specific goals,  

wants companies to be making a positive impact,  wants to see evidence of good stewardship,  

so will be voting at those annual general  meetings if they don't agree with executive pay.

Impact – this is getting more specific now.  This will be a fund manager that's looking for  

companies that are having a positive impact  on the world, perhaps in energy efficiency  

or carbon reduction, or even just fair pay. And  finally, you can get a sector or a thematic fund.  

And that will really focus on, again, clue in  the name, specific sectors. So, that could be a  

renewable energy or a water fund, really targeting  companies that are trying to make an impact in a  

specific industry. So, ESG, maybe it's not for  you, but it's not as confusing as you think.