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While environmental, social, and governance (ESG) is a term that has become commonplace for investors over the last few years, it remains a complicated and misunderstood market. The ability to break the market down into three distinct areas gives investors the ability to sift through what is quite a crowded place.
Who’s this for? All investors
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. The past performance of investments is not a reliable indicator of their future performance.
Looking for a ‘responsible’ or ‘sustainable’ investment fund, but don’t know where to start? It can be confusing. Some investment funds that have an ESG (Environmental, Social and Governance) approach are quite obvious, simply by looking at their names. But for many funds, it’s not that obvious.
More and more investment funds are adding ESG steps to their investment process, such that they look like traditional funds on the surface, but dig deeper and you’ll find an increasingly more responsible approach to how they invest. And that’s why it can be a difficult area to get started, because no two ESG funds are the same.
It can mean many things. It can mean investing only in those companies that making a positive impact to the environment or society. A ‘positive impact’, for example, could be a company involved in recycling plastics, or a company that promotes gender diversity in the workplace. ESG investing could also mean avoiding those companies that the fund manager disapproves of. Or, it could mean investing in any type of company, and using your vote as a shareholder to make changes for the better. Responsible investing is about all of these things.
At Barclays, we have tried to simplify the world of ESG funds, by breaking the market down into three categorisations.
The first is what we call ‘ESG integrated’. These funds can try to protect the value of its investments by not buying companies because of what they do to the environment, society, or how they are managed. The fund might think these companies are risky, and their share prices are more likely to go down, and not up, over time. For example, it may not own companies that have a larger than average carbon footprint.
Other ‘ESG integrated’ funds might choose to own ‘risky’ companies, but try to make them better. One way they can do this is by voting against the company or the people in charge of it, if they think they are not doing the right thing. They hope that making a company change how it works will be good for the planet, but will also lead to its share price going up.
But it can be difficult to identify these funds. They often have simple names, such as ‘UK Fund’ or ‘Global Equity Fund’. Under the surface, a significant number of funds with these names may have a ‘responsible’ investing policy, but every fund will apply that policy in a slightly different way.
The second categorisation takes the integration of ESG one step further. This involves funds which will only invest in companies that are addressing today’s sustainability challenges. Examples include climate change, the use of our planet’s natural resources and overpopulation. We classify these investment funds as ‘sustainable’. These funds tend to have the words ‘sustainable’ or ‘responsible’ in their name.
The third stage of ESG investing is what we call ‘catalytic’. The word ‘catalytic’ has Greek origins, and it refers to something or somebody being involved in helping to undergo fundamental permanent change. In the world of ESG investing, catalytic investing means investing in companies addressing specific challenges. Examples include clean energy funds, social bond funds and healthy living funds – each of which focus on one very specific challenge. These funds are often known as ‘impact’ funds.
What is key is thinking about what is important to you individually before investing. Your investment may help to shape the future of the planet. So, do you want your money invested in companies that are already regarded as the best managed or for the way they treat the environment, or do you want to invest in those that are making serious steps to improve?
If you want to learn more about sustainable investing, visit our ‘What is ESG investing’ page
There are a number of funds on the Barclays Funds List that focus on ESG, such as the Jupiter Ecology Fund, BlackRock Sustainable Energy Fund, and the Janus Henderson Global Sustainable Equity Fund. Find out more information on these funds.
Correct at the time of publishing.
To diversify your investment, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These Barclays multi-asset funds invest in passive funds across a range of asset classes and regions, offering a globally diversified solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.
Past performance of the fund and its manager are not a reliable indicator of their future performance.
We don’t offer personal investment advice so if you’re unsure you should seek that independently.
Funds are designed for the long term so you should only consider them if you can stay invested for at least five years. These are our current opinions but the future, as ever, is uncertain and outcomes may differ.
Read the Assessment of Value report[PDF, 3.1MB] for funds run by Barclays.
The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.
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