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ESG investing: the trend becomes the norm

ESG investing is more popular than ever. What's more, the question is no longer if it will completely overtake traditional investments, but when. "As far as I'm concerned, there's not one single reason not to engage in ESG investing", says expert Hans Timmerman of ABN AMRO Private Banking.
The popularity of ESG investing is a sign of the times. "The realisation is sinking in that we can't just keep muddling along without taking climate change and other factors into account," Timmerman says. His colleague Joachim Aelvoet adds: "If you as a parent see your child missing school to go on a climate change march, you'll probably start thinking about the future." What will the world be like for our children and grandchildren? This question is more and more on the minds of investors and is affecting what they decide to invest in.

Lower returns?

Still, there's a bit of an obstacle, as many people wonder about the returns on ESG investments. "A lower return is still the biggest misapprehension", says Aelvoet. "In the meantime, all the indicators are pointing towards higher returns over the longer term. Oil companies, which we exclude, are currently achieving a few percentage points more. That's normal given the current situation. However, there's every indication that their economic valuations are actually falling over the longer term." 

That's pretty logical, really, given the pressure fossil fuels are under. Europe is firmly putting the pedal to the metal towards fossil-free fuels. It aims to be completely climate-neutral by 2050 with its Green Deal. Countries such as Germany are taking things one step further by aiming to achieve climate neutrality as early as 2035. "In other words, the oil company stocks are going to be worthless in the foreseeable future", Aelvoet continues. The energy transition is also gathering steam in other parts of the world

More than just the environment

However, sustainability is about more than just the environment alone. Hans Timmerman sums it up: "ESG investing is based on three pillars: Environment, Social and Governance. The ESG score covers all these three pillars combined. It reflects each company's environmental impact, social responsibility and good corporate governance. This includes aspects such as CO₂ emissions, differences in salary, staff training courses, safety policy and fleet sustainability." 

Companies that score well on these elements are potentially of interest for your investment portfolio. You can compare this to the fourth industrial revolution or, more recently, to digitalisation. Those who decided to get on board early with those also discovered great potential. Companies that missed the boat collapsed

Pay attention to sustainability

But how can an investor make sure their investments actually meet the ESG criteria? Doesn't everything end up in the same big pot anyway? "Absolutely not", says Timmerman. ABN AMRO works with the sustainability ratings agency Sustainalytics. "They set the ESG score and ranking of around 13,000 companies for us. All the investors who we advise or whose assets we manage receive a detailed quarterly report that includes their investment portfolio's ESG score, the carbon footprint of the companies in question and their contribution to the SDGs (UN Sustainable Development Goals)." 

We also pursue a clear policy of exclusion for companies that aren't eligible. Companies that are part of the tobacco industry or arms trade or are responsible for serious environmental damage, human rights violations or child labour are immediately excluded. Fossil fuels are also ruled out. 

What remains are companies with a good score and innovative companies that contribute to one or more forward-looking sustainability themes. Some of those companies are genuine sustainability pioneers, but the majority are companies who are following in the pack. "They're certainly not yet the best in class, but they do have an ambition of contributing to the transition. And that's where we expect the greatest acceleration", Aelvoet says. In other words: huge economic potential. And Hans Timmerman sees another advantage: "It also gives our clients a clear conscience", he concludes.

ESG investing = sustainable investing?

And if you want to take things one step further, you can also opt for sustainable investing. This is not the same as ESG investing. In sustainable investing, you choose to put a company's positive impact on people and society first, and the financial return second.