ESG investment is a form of sustainable investment that takes into account environmental, social and governance factors to assess the financial returns of an investment and its overall impact. The ESG score of an investment measures the sustainability of an investment in those specific categories. It is important to carefully consider the investment objectives, risks, charges and expenses of the funds before investing. Sustainable or mission-based investing does not have to be at odds with the trustee's fiduciary obligations. Environmental, social and governance (ESG) factors are used to evaluate the sustainability of a company or investment.
Academic research has revealed that high ESG ratings are associated with lower cost of capital, higher market performance, and higher performance based on accounting. The UPIA does not explicitly mention investment in ESG, but the clause requiring trustees to evaluate the “special relationship” or the special value of an investment provides flexibility to consider the ESG preferences of grantors or beneficiaries, if those preferences are documented. For instance, the IFRS Foundation created the International Sustainability Standards Council (ISSB), while the European Commission (EC) adopted a proposal for a directive on corporate sustainability reporting (CSRD).Many believe that sustainable investment does not violate fiduciary duty and, in fact, can be beneficial for it. Building an investment portfolio takes time, especially when it comes to finding investments that fit a certain framework, such as ESG criteria.
Alternative investments are speculative, carry a high degree of risk, are highly illiquid, tend to have higher fees than other investments and can use leverage, short selling and derivatives, which can increase the risk of investment losses. Sustainable investment continues to gain momentum among major investors, and trustees will benefit if they keep abreast of evolving legislation and its interpretation and, as always, if they keep the needs of the beneficiaries they serve at the forefront of their decisions. The information provided in this material is not intended to be and should not be considered a recommendation or suggestion to adopt or refrain from adopting a particular course of action, making or maintaining a particular investment or following a particular investment strategy, including the possibility of buying, selling or holding any of the above mentioned securities. There is no guarantee that any investment strategy will work under all market conditions, and every investor should evaluate their ability to invest in the long term, especially during periods of market downturn. Another common term for creating a sustainable investment portfolio is socially responsible investment (SRI).
However, creating a strong sustainable investment strategy remains an obstacle for many asset owners. When it comes to fees and expenses associated with sustainable investments, there are some special considerations that need to be taken into account. Investors should be aware that alternative investments may carry higher fees than other investments due to their speculative nature. Additionally, trustees should ensure that they are up-to-date with evolving legislation related to ESG investing in order to make informed decisions that benefit their beneficiaries.