July 13, 2023
5 min read
Investment and Life insurance
FWU - Expert Corner - FWU AG
ESG stands for Environmental, Social and Governance, and provides an analytical framework for assessing companies based on sustainability-related criteria. Broadly, ESG can drive positive change by investing in companies that act sustainably. ESG investing has the important added benefit of steering funds towards companies that are likely to generate better long-term performance. Thus, sustainable investing gives sustainable profitability.
ESG investing is a way to make sure that your investment ticks the boxes when it comes to being green and ethical. By holding companies to Environmental, Social and Governance criteria and monitoring their performance in these areas, it encourages them to act responsibly. ESG funds give investors a way to support issues that they care deeply about as these sustainable funds contain equities and/or bonds for which ESG standards have been integrated into the investment process.
This is a fairly new development; until about a decade ago investors looked mainly at financial statements and the ‘bottom line’. They wanted companies to focus on immediate profits, and rewarded those that did so. Investing was all about returns, and management was all about increasing shareholder value. This attitude changed after the 2008 financial crisis, which was triggered by poor governance, lax supervision and a blinkered focus on short-term profits. Investors realized that they needed to pay more attention to how companies are run when making investment choices.
Meanwhile, rising societal concern about inequality created an awareness of the need for companies to act more socially responsible. But by far the most important driver of sustainable investing has been the growing public understanding that climate change is a real, and ever more urgent, threat.
It should be noted that “sustainable” here works in two dimensions.
One is the “good for people and planet” or corporate responsibility dimension that we’ve grown accustomed to hearing about.
The other dimension, which is at least equally important for the investor, is the literal meaning of “able to remain viable over the long term”.
But is sustainable investing profitable? In a nutshell, companies that act sustainably in the sense of corporate responsibility, also tend to return profits dependably and thus be sound investments. There will be no, or fewer, profit-eating scandals, scams and lawsuits if a company is behaving itself, no surprise environmental clean-ups if a firm is taking steps to reduce its environmental impact, and better employee retention and performance if a company is treating its people well. Studies back this up, showing that sustainability tends to correlate with better financial performance.
Let’s look at each of the ESG components. First there is Environment. No surprises here; a sustainable company will work to reduce its carbon footprint, pollution, waste, resource use and overall environmental impact. This is obviously beneficial to all of us who live on planet Earth, but it also minimizes regulatory penalties and unforeseen mitigation costs.
Then there’s the Social aspect, which has internal and external components. Internally, a company needs to treat its employees well, uphold high health and safety standards, be non-discriminatory in hiring and promotions, and offer worker training. Externally, responsible companies pay their taxes and engage in positive ways with their communities. Further afield, a company should insist that its suppliers act responsibility. This may even include programs to benefit people in the regions where companies source their raw materials.
Governance is the third ESG aspect, often overlooked but no less important. How is a company managed? Is the board of directors independent or do they just rubber-stamp what the CEO says? Is power too highly concentrated? What about executive compensation – is it too high? If it is, it can endanger the company’s ability to invest. Crucially, is the company’s reporting accurate and trustworthy?
There are many research firms that examine ESG reporting and criteria to determine a company’s sustainability, looking at annual reports, corporate sustainability action, management, board structure and compensation. We at FWU take this very extensive ESG data, as well as information from news articles and reports from NGOs, and apply our own “Big Data” approach, using algorithms to sort through it all to get an objective picture.
FWU uses a scoring system that looks at all the ESG criteria and ranks companies from 0-100 in overall sustainability. The environmental category is aligned with the EU Taxonomy for Sustainable Activities, which is discussed in detail in our white paper. In a nutshell, this is a European policy that identifies where investment is needed to facilitate the energy transition. FWU also applies Principal Adverse Impact Analysis, to not only see what a company is doing right, but whether it is doing something wrong that it needs to change.
Our white paper goes into much more detail on how we rate sustainability; suffice it to say here that all this gives us a very granular, objective and transparent view of company performance in the environmental, social and governance metrics.
Responsible investing is important to us and to our clients, and we offer different levels of sustainability to choose from.
FWU Quant funds do not contain companies that score below 10 in our ESG score. Companies scoring 10 to 29 are considered as investible for so called “light green”* funds; they are investable, but not optimum from an ESG standpoint. For deeper sustainability we have “dark green” funds** composed exclusively of companies ranking 30 or higher across the aggregate ESG score. For these companies we also apply the EU Taxonomy for Sustainable Activities and Principal Adverse Impact analysis.
You can find a snapshot of what we do in our Infographics. You can also download our white paper to learn more about our ESG funds and this fascinating topic in general.
ESG means a company’s performance in the metrics of Environment, Social and Governance.
Many different research companies score ESG based on annual reports, corporate sustainability measures, management, structure, executive compensation and other information.
For one thing, it helps make the world a better place in defined, quantifiable ways. For another, it tends to give better long-term financial returns, since companies that act responsibly and sustainably tend to be better managed, and also experience fewer legal and public-relations issues.
*Vert clair (Light Green), for the purposes of this document, means External Funds promoting sustainable investments according to Art. 8 of the Reg. (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (“SFDR”). For more details, please check the precontractual information of the respective product or the information available on https://www.forwardyou.com/en/products/reporting-center/.
**Vert foncé (Dark Green), for the purposes of this document, means External Funds promoting sustainable investments according to Art. 8 of the Reg. (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (“SFDR”), which have a commitment to invest to a specific degree in Sustainable Investments according to both the SFDR and the EU-Taxonomy Regulation, and which take Principal Adverse Impacts into consideration. For more details, please check the precontractual information of the respective product or the information available on https://www.forwardyou.com/en/products/reporting-center/.
This communication is for advertising purposes only, so it does not (nor is it intended to) have any legal relevance or provide any guarantee or informational supplement with respect to, or substitute for, anything contained in the product information regarding a concrete financial product of FWU. Only the concrete product information should be used by the prospective client for any information about the financial product in question and in deciding on the signing of such a contract.
The document is issued by:
FWU Life Insurance Lux S.A.
33, rue de Gasperich
L – 5826 Hesperange
GD de Luxembourg
Tel. +352 26 49 42 00