What is ESG and why is ESG Investing important?

ESG investing has increased in popularity in recent years and is a term used throughout the investment industry, but what is ESG investing and why should investors be aware of it? This commentary piece explores a little bit more about ESG Investing, what it is, where it originated from and also how Castlefield approaches ESG.

What is ESG investing?

ESG stands for environmental, social and governance. ESG investing is an investment approach that has increased in popularity over recent years, as investors have become more concerned about the types of companies in which they invest and how their money is used. Investment managers of funds with an ESG mandate will typically incorporate non-financial factors in their decision-making process.
Investors are increasingly including ESG factors into their decision-making process, when determining which companies to invest in, as a way to identify material risks and growth opportunities.

Typical ESG factors include the following:

E – Environmental factors such as an organisation’s carbon emissions and climate policies, energy efficiency, pollution, water usage and waste management
S – Social factors such as the general working conditions and labour standards, health and safety of employees, gender and diversity issues, data protection and privacy
G – Governance factors include issues such as executive pay, board composition, lobbying, bribery and corruption.

It seems obvious that the way that companies treat their employees, along with how they manage their environmental impact and how they are operated can have a detrimental impact on their financial performance. When managed poorly, these can significantly affect finances – for example through poor reputation and brand damage, higher staff turnover and lower productivity, or through heavy fines and compensation. Numerous examples for each of these will no doubt immediately spring to mind.

ESG Investing Trends

Demand for ESG investing has continued to accelerate of late and there have been several key ESG investing trends emerging – from climate change to social unrest. Consumers (and investors) are increasingly holding companies accountable for their performance on environmental, social and governance benchmarks.

The high-profile UN climate change conference and the global coronavirus pandemic have also intensified focus and debate about the role of the financial system in the sustainability of the planet.

With more companies and governments making net zero pledges, the race to reduce carbon is fuelling increased investment in green technologies and low-carbon alternatives, as an engaged population of climate friendly consumers demand more from the companies they choose to invest in.

Measuring ESG – ESG Metrics

Currently, there is no single standardised way to appraise ESG factors or a standard list of ESG examples for investors to use as a guide. ESG factors are often interlinked, and it can be challenging to classify an ESG issue as only an environmental, social, or governance issue. As such, investors can use a variety of different analytical approaches and data sources to address ESG considerations, including weighting to client interest and potential value. Understanding the relative merits and limitations of different metrics can help to form a more complete picture of ESG risks and opportunities.

How does ESG Investing differ from ethical, sustainable and other investment approaches?

Given that there isn’t a standard definition of what constitutes an ESG fund or ESG investment approach, there are many crossovers with ESG and other approaches. These include ethical investing, responsible and sustainable investing along with others – such as impact investing. Throughout the financial services sector these terms are frequently used interchangeably by some managers, so investment funds may include some of the following in their name i.e. ethical, ESG, sustainable, responsible etc. There are also some investment funds being labelled as a sustainable or ESG fund when the holdings within it may appear to be contradictory to this, as firms try to capitalise on the growth of ESG investing.

While some ESG factors do describe aspects of company sustainability, its aim is to unlock factors that affect financial performance. ESG investing is an evolution out of earlier investment philosophies such as Socially Responsible Investing (SRI) and ethical investing, however there are key differences. Earlier models typically use value judgments and simple negative screening to determine the companies to be invested in.

ESG investing and analysis, on the other hand, looks at finding value in companies—not just at supporting a set of values. Some ESG approaches may therefore still invest in sectors that many people may consider unsustainable – like tobacco manufacturers or those involved in the extraction of fossil fuels. It can get quite complicated, as this 'Challenge of investing ethically' guide tries to outline.

How does Castlefield approach ESG investing?

As a specialist in responsible ESG investment, Castlefield has developed the B.E.S.T investment process - a proprietary investment approach that integrates ESG factors from the outset.

This looks at the following factors:

Business & financial
Environmental & ecological
Social
Transparency & governance

The B.E.S.T. investment process is our ESG framework underpinning everything we do; ESG considerations are woven into our investment process.

We prospect for investments not only on traditional financial criteria, but also on a range of other sustainability factors, as we want to detect where non-financial risks might morph into business and financial risks which impair our clients’ investment. All of the investment team at Castlefield is involved with every aspect of the B.E.S.T process - it is a truly integrated ESG approach.

Unlike some ESG investing firms, Castlefield choose to exclude certain harmful sectors – such as tobacco and fossil fuels. Our screening policy complements our B.E.S.T process and highlights sectors we actively avoid (negative screening) while highlighting the positive investment themes we look to support. You can find more details of these at this link to our screening policy for our B.E.S.T Sustainable fund range.

Castlefield manages a range of investment funds that use the B.E.S.T Sustainable methodology and is committed to integrate ESG across all of our fund research, conviction and monitoring processes. Castlefield is also a signatory of the UN Principles of Responsible Investment and UK Stewardship Code. We take our role as thoughtful investors seriously, so active engagement and openly reporting on ESG initiatives and voting are incredibly important to us. Being members of these respected organisations means that we actively and openly report on our ESG activities regularly, and helps to demonstrate our commitment to maintaining the highest standards of responsible investment. You can find details of our stewardship and voting, along with our latest Stewardship Reports at by following this link: Stewardship at Castlefield.

Examples of ESG investing

Each month we publish featured stock stories from within the B.E.S.T Sustainable fund range to demonstrate how ESG investing works at a practical level, and to show what being a thoughtful investor is all about. You can find our featured stock stories within the Blog contained in our News & Media section of our website here. This document also summarises a few other ESG examples of the firms we invest in to show how we use the money invested in our funds and gather assets to do good.

We recently hosted a webcast where we were joined by Adam Moloney, the CFO from sustainable tech leaders 'Blancco Technology' (one of our investee firms). He told how they approach ESG considerations and the increasing prominence of ESG on the corporate agenda.

Our European fund manager Rory Hammerson and Senior Executive Amelia Overd also explained what the different investment approaches mean i.e. ESG investing, ethical investing, responsible and sustainable investing etc. and outlined how we determine which companies to invest our client's funds in.

You can watch the Introduction to Thoughtful Investing here, to hear from one of our investee firms and see real life examples of ESG investing.

What is ESG and why is ESG Investing important?