Digital wealth management: ESG on the rise
Summary: The correlation between sustainable investing and financial performance is often being questioned. However, studies by S&P Global suggest that the consideration of ESG factors actually enhances the long-term financial performance.
The foundations of ESG investing
Environmental, social and governance (ESG) criteria constitute a set of standards for a company's operations that determine its sustainability and ethical impact. One way to analyse whether a company is meeting these criteria is to work out the company's total exposure to material ESG factors, such as natural resource management, labour practices and accounting standards. The total exposure is split up into manageable and unmanageable risk, where the company's policies, practices and programmes' mitigation of the manageable risk determines the level of ESG adherence.
The growing interest in ESG
Interest in ESG has grown rapidly in recent years, with investors increasingly integrating ESG factors in their investment strategies. According to a survey by Morgan Stanley, about 84% of the requested asset owners are considering ESG factors when evaluating investment opportunities. Further, the same survey revealed a preference for stocks among the asset owners when picking quality sustainable investments.
Although investors have their own individual objectives, the increasing interest in ESG investments seems to stem from two major objectives: values and investment performance.
Values can be split into two factors, internal and external, where the former includes ethical, religious and political beliefs, while impact on one's surroundings constitutes the external factor. Investors filtering on their personal values are typically trying to exclude controversial business, including tobacco, weapons and alcohol. In comparison, investors focusing on external values are filtering out investments based on environmental and social variables.
The second major objective for investors to integrate ESG factors in their investment strategies is investment performance. Studies, like this analysis by S&P Global, highlight links between ESG and financial performance, fuelled by underlying factors such as improved corporate reputation, reduced operating costs and new market opportunities. Furthermore, approximately 90% of US consumers would buy a product based on the company's degree of ESG implementation, indicating a further potential upside in company performance.
A convenient approach to ESG investing
Saxo’s managed ESG portfolio, the Brown Advisory Ethical Selection, is a ready-made portfolio of 30 to 40 stocks chosen for their investment potential and adherence to ESG practices. The most favoured companies not only follow ESG practices, but embrace them proactively for business success. More specifically, Brown’s ethical selection strategy is governed by fundamental research and ESG filters, with companies chosen for their fundamentals also tested against several ESG screens.
Read more about Brown Advisory Ethical Selection here.
The Brown Advisory Ethical Selection stock portfolio is assessed as a high-risk portfolio given its concentration in ESG-filtered equities.
The portfolio-risk partially stems from asset-specific risk, as the portfolio invests in selected companies and not overall indices like for ETF portfolios. Factors influencing the value of the underlying equities in the portfolio include political and economic news, daily stock market movements, significant corporate events and company earnings. Moreover, the portfolio-risk is further increased given its sector concentration, filtering out equities that do not meet the defined ESG criteria. Hence, the portfolio is more sensitive to localised economic, market, political or regulatory events.
As a reference, investing into stocks is considered high risk, and during a bad period the stock market value could decline by more than 20%, based on historic events.
SaxoSelect: our low-cost digital wealth management service
Investing in SaxoSelect managed portfolios not only guarantees you a convenient holding period but also top-quality investment management. Our stock-picking process is based on rigorous research and time-tested investment principles from leading experts, which, combined with our industry-leading technology, gives you a unique investment opportunity.
Read more about SaxoSelect here.