There is growing urgency to curb global warming and environmental damage by making more ethical business and personal choices. Investing in businesses and industries that are unethical or contribute to such damage is not a recipe for a sustainable future.

Ethical investing has been part of the global business landscape for some time now, and these investments are not just about being responsible and doing good – there are tangible benefits for your business and investment returns too. Finance, access to capital, and enhanced brand value are all potential benefits of an ethical approach to investing and doing business, and it can also improve insurance rates, operational efficiencies, and employee engagement.

What is ESG?

ESG stands for 'environmental, social and governance' considerations, which are at the heart of ethical investing. ESG-conscious companies take measures to reduce pollution, CO₂ output, and waste, and employ a diverse and inclusive workforce, from entry level to the board of directors.

ESG investing refers to investors who wish to align their portfolios with ESG-conscious companies and fund providers. Here's a list of some of the external factors that drive an ESG approach:

• Climate change
  Companies are under pressure to reduce carbon emissions and combat global warming. Companies that are doing this are increasing their competitiveness and attracting new ESG investment.  
  
  
• Social factors
  Issues like inequality, discrimination, and labour exploitation are growing concerns for consumers and investors alike. Companies that are clear about supporting social justice and human rights have a stronger brand image and are gaining more customer and investor loyalty.
  
  
• Accountable governance 
  Ethical, accountable leadership, executive pay, audits, and shareholder rights are all in the spotlight as never before.

ESG investing

Investing from an ESG perspective means investing in stocks, companies, and industry sectors that match your values. There are now many ESG-focused exchange-traded funds (ETFs) and other financial products available for ethical investors. Large institutional investors internationally, such as public pension funds, are also making the move to ESG investment. For example, an ESG investment fund might avoid investments in coal mining, tobacco products, or arms, and seek to invest in companies that use renewable energy and have ethical supply-chain and labour practices.

In addition to their inherent value, ESG criteria can help investors hold unethical companies to account through hurting their share prices when such behaviour is exposed. Financial services companies, including some of the major global banks, are now increasingly tracking ESG performance and its impact on their bottom line. While ESG investment means that certain categories of stocks are not available to ethical investors, including dependable market performers like the tobacco and defence industries, this is offset by the sustainability of the approach.

ESG investment approaches

Apart from the general ESG approach to investing in sustainable business practices, there are other approaches available that are all established in the market:

• Socially responsible investing
  This approach actively avoids investing in ethically controversial industries like gambling, arms, tobacco, alcohol, and oil.
  
  
• Impact investing
  This investment approach looks to combine social and environmental benefits with financial growth prospects. A good current example would be investment in solar energy companies.
  
  
• Faith-based investing
  These investors will invest only in companies that conform to their religious values.
   

As with any investment portfolio, if you want to invest ethically in socially responsible industries, you can build your own portfolio by focusing on individual companies that meet these conditions, but this is always a more time-consuming approach. There are existing mutual funds and ETFs that follow ESG investment principles and only invest in companies that meet those ethical standards. Investing this way can lead you to a diversified portfolio with exposure to a variety of companies.

Making your ESG investment

If you’re interested in investing in ESG-focused businesses and industries, you can do your own research, or you can look at international ETFs such as these clean energy funds:

• Global X Lithium & Battery Tech ETF (LIT)
• Invesco Solar ETF (TAN)
• First Trust Global Wind Energy ETF (FAN)
• SPDR Kensho Clean Power ETF (CNRG)

Nedbank Private Wealth has been a signatory to the UN-supported Principles for Responsible Investment since 2022. A key pillar is the integration of ESG into the investment process. Several of our local and global investment partners subscribe to the same body, each bringing to the table unique ways of incorporating ESG considerations. Our European-domiciled funds are also categorised according to the region’s Sustainable Finance Disclosure Regulation. Some of the Article 8 – or ‘light green’ – funds include the Nedgroup Investments Global Equity, Global Property, and Global Strategic Bond Fund.

Many experts are seeing dramatic upswings in the returns on ESG investing, especially when the companies concerned are aligned with government policy and consumer demand for more sustainable, cost-effective solutions. In South Africa, the strongest investment case to be made, driven by demand and necessity, is for companies in the clean energy sector. But other ESG concerns are equally valid in the current South African business landscape, such as responsible water use, product quality, worker safety, labour standards, executive pay versus employee pay, and long-term sustainability.

The Johannesburg Stock Exchange (JSE) has been a market leader in the field, with a history of sustainability ETFs. In recent years, the bourse listed 2 global ESG-focused ETFs on its main board: the Satrix MSCI EM ESG Enhanced ETF and the Satrix MSCI World ESG Enhanced ETF. In 2020, the JSE also expanded its Green Bond Segment of the market to a fully-fledged sustainability segment, making it easier for companies to list and trade sustainability-related instruments that raise funds for activities directed at sustainable development.

Read more about Nedbank’s business approach to sustainability.

For guidance on your own ESG investment approach, consult our investment experts.