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Investing Sustainably

How Environmental and Social Governance (ESG) has Impacted Global Investing.

December 31, 2021

The History of ESG 

While there have been some earlier political efforts, it was the letters in 2004 from then UN Secretary-General Kofi Annan that set the stage for modern ESG business practices. Kofi Annan wrote to over 50 CEOs of major financial institutions across the globe, and the wheels began turning on modern Environmental, Social, & Corporate (ESG) investing.

In 2006, the Secretary-General launched the 'Principles for Responsible Investment,', creating the backbone of today's ESG efforts and the Sustainable Stock Exchange Initiative. These initiatives and investment styles sought to affect change in several areas, including;

  • Development of EU policies around sustainable financing
  • Practices that fuel an improved quality of life for citizens
  • Decoupling of economic growth from the depletion of natural resources
  • Creating portfolios that reflect investors' vision for a better future
  • Support of companies that are mindful of their overall impact, including renewable energy use, green products, and carbon footprint

Understanding the Concept of ESG

ESG investment is a form of socially responsible and ethical investment. When investing, one is, of course, making a priority of strong financial returns. Still, trends are increasingly indicating that more and more investors are examining ESG criteria before making decisions. Moreover, in an ever-evolving world of climate change, social movements, and political uncertainty, investors want to maintain a level of conscientiousness around where exactly their money goes.

Consequently, companies are developing within the ESG landscape. The growth of conscientious investing can lead to many substantial and meaningful changes within corporations, such as affecting leadership, the alignment of values by the heads of companies and their shareholders, and affecting board composition. And it is not only millennial investors who are moving toward ESG investments. Recent studies show that 70% of pension holders 45 and over believe ESG principles are important to consider when deciding how they will invest their pension. The principles stretch across all age groups.

The Impact of Your Investment

A company's internal conduct should also be subject to close scrutiny and investors guided by ESG principles will favour companies focusing on transparency and fairness. In environmental areas, companies that consider their energy consumption, water usage, and policies on climate change will be preferred. Community engagement, equal employment opportunities, and the health and safety of workers are all social factors that investors will lean towards.

Since policies also affect investments, the financial analysis further evaluates risks and opportunities to impact ESG factors. Factors like supply chain management, political spending and environmental protection are all up for consideration. Investment into companies that observe these practices limits negative societal impacts as well. Minimising the displacement of citizens is a genuine concern of ESG initiatives.

How Your Values Can Align With Investing

Making a difference with your money is on investors' minds across the globe. Honing in on what issues truly matter to each individual is beginning to align values with investments. In addition, determining which companies hold values and principles that fit your outlook helps determine where your money would have the best reach.

Since values are unique to every investor, it's critical to know which investments to support and avoid. Mutual funds are a worthwhile consideration when deep dives into individual stocks can be intimidating. Here at FitzGerald Flynn, we can help you determine which options are available to you and which options line up best with your set of ethics and goals. An open and honest conversation with us will allow you to better understand companies and funds that align with your finances and your values.

How to Get Started In ESG Investment

Knowing where your values fall is crucial, as is realizing the strength of your investment. Your money can go a long way and can have a positive impact if channelled in the right direction. If you decide to research stocks and funds, it must involve a close appraisal of the company's sustainability, social impact, and environmental stress. There is a broad range of policies, but knowing what matters to you goes a long way.

Reading up on a company's initiatives toward sustainability can help you to understand the backbone of a company. Additionally, chatting to experienced financial planners such as ourselves will help you to find the ESG investments that are the most appropriate fit. 

What Good and Bad ESG Investments Look Like

Finding a suitable ESG investment does not mean you have to sacrifice any potential profit. Trends indicate that more and more investments with strong ESG ratings are yielding promising returns. Additionally, ESG funds are being shown to outperform conventional investments while carrying lower risk.

A recent Morgan Stanley study has shown that ESG-focused investments consistently carry a lower downside risk regardless of the asset class. A balance between a solid ESG rating and a comfortable risk level can be found and capitalized upon with the right set of financial decisions. 

Despite a global push towards sustainability, some companies are slower to abandon archaic business models. By speaking to our advisors here at FitzGerald Flynn, we can steer you clear of companies with a low ESG rating that are not likely to fit your portfolio. Some organisations barely pass the bar for what a suitable corporate entity looks like under ESG initiatives and can not be expected to be consistent with your impact values.

The Success of Your Investments

An impressive ESG rating can speak volumes to the integrity and clarity of a company's leadership and vision. A corporate structure that can implement these initiatives successfully indicates a company with a keen understanding of how trends move. Profitability does not always indicate a positive ESG rating, but a positive ESG rating can usually point towards a company's intelligence and flexibility and, in more cases than not, profitability.

A shrewd eye for sustainably managing the expectations of ESG-focused trends and investors gives credit to an ability to maintain sustainability in the marketplace. 

Large Companies and Players in the ESG Investment Market

Alliance Bernstein is an asset management firm with a strong global presence who are committed to environmental and social governance principles. Their leadership, along with solutions, they deliver to clients. As a result, they are in a position to address disruptions in the global economy, and they place their corporate stance on climate change out front.

Headquartered in France, AXA Investment Managers is another management firm committed to doing its part in the mission to net-zero greenhouse emissions by the year 2050. Climate action is front and centre in the messaging and action of this global player. Their investment choices reflect these commitments and the products they offer to do as well.

Ratings/Grades of ESG Investments

The MSCI ESG rating demonstrates a company's environmental, social, and governance risk using a succinct grading system. It includes ratings ranging from CCC, in the 'Laggard' category, to BBB, in the 'Average' designation, up to AAA in the 'Leader' column.

The purpose of the rating is to identify a company's long-term resilience and the ESG risks according to a methodology that the global provider, MSCI, has devised. They also rate fixed income securities, equity, mutual funds, ETFs, loans, and countries for these same risks.

Where to go when looking to invest in ESG?

Companies supply corporate reporting for ESG initiatives and display measurable and quantified goals. This is an excellent start to source stocks and funds that touch on values you hold in terms of sustainability. Additionally, some reporting has more detail and can suit your goals for investing better than others. The UN provides the United Nations Principles for Responsible Investment report. A Global Reporting Initiative also supplies further deep dives into companies.

In addition to supplying a rating system, MSCI has sustainability reports that help with investing research. Prominent publications like Forbes also report on ESG compliant companies. ESG funds such as the 1919 Socially Responsible Balanced Fund (SSIAX) and Pax Large Cap Fund Institutional Class (PXLIX) provide insight without requiring you to take a granular look at every individual stock.

Getting in touch with a financial advisor is always a terrific place to start. While all of this can seem daunting at first glance, rest assured that our experts here at FitzGerald Flynn are here to talk you through each step of your ESG investment and point you in the right direction. Talking to one of our experienced professionals can help you sort through the excess news and noise and lock in on investments that present robust returns and sturdy principles in terms of global impact.

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