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Urquhart-Stewart: How ESG investments that lack substance can do more harm than good – #WorldEarthDay

This article features as part of IFA Magazine’s celebration of World Earth Day

By Justin Urquhart-Stewart, Co-Founder and Chairman of Regionally, a UK investment service for private investors and businesses based outside of London. 

How many times have we been taken in by the apparent almost “mystical” skills of seemingly untouchable investment managers like Madoff and Woodford, only to find that they are charlatans in how they treated their investing clients?

Or how many times have we been seduced into the new investment trends of fashionable emerging markets or the latest unintelligible innovations?

Yes, fashion fads do eventually become financial embarrassments, but didn’t they sound convincing at the time?

So, are we a now seeing another such event occurring which could end in yet another financial catastrophe? The answer is probably both yes and no – which is rather unhelpful. Let me explain. The change towards more ethical, environmental, and social investment is certainly occurring.

These days we have the trendy letters of ESG (Environmental, Social and Governance) which are now thrown around as the latest investment trend. Ten years ago, few were interested in truly sustainable investment and often it would be only added into a portfolio as a salve to an investor’s conscience.

Now, however, that attitude has dramatically changed as many investors are seeing this as a necessary core to their future investments and we are seeing this not just in private pensions, but also local authority investments and institutional funds. So, this trend is a real shift and will likely continue.

However, there will also be a darker side to it as certain companies will make bland statements about their environmental commitment and that they will become “carbon neutral” by a date so far ahead that hopefully you will have forgotten it by the time it arrives. Also, there will be “green” funds which will talk the talk but provide an almost totally convincing charade. Beware “green- wash”.

So as professional advisers and investors what are we supposed to do? The answer lies in good discipline and practise and please add to that a healthy dose of scepticism. We need to fall back on the sound rules of evaluation, experience, and track record.

This may sound quite dull in comparison to the excitement of new technology and the fashion for all things clean and green, but here I find dull far more fulfilling than risking client funds on trendy fashions and popular myths. I, for one, though will be digging hard through filthy mud to find out if my fine green growth is a healthy fund or future evil financial knot-weed lurking below the surface.

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