Alasdair Wilson, Investments Techspert at The Verve Group, considers the S in ESG – the social factor – and finds investing is not as simple as it might seem.

Much like the wider financial press and fund house literature, something I’ve perhaps been a little guilty of in the past is focusing too much on the environmental aspects of ESG-integrated investing. However, understanding the social and governance factors and how they fit in with fund house and portfolio manager scoring systems will help explain to clients why certain companies (heavy polluters, fossil fuel extractors) are present in their ESG investment portfolio.

Before we get into those, I feel it’s always important to stress that when ESG strategies are referred to as ‘sustainable’ it has nothing to do with being green. ESG strategies are sustainable in terms of their long-term growth and returns, and are often limited in their ethical stance on the majority of common issues.

Firstly, we’ll have a look at the social factors that influence a fund manager’s ESG score of a company, and the impact they could have on the business that might disrupt the sustainability of their returns. A company’s adherence to human rights, child labour and modern slavery laws will be fairly well enforced regarding their operations in developed nations. However, they may still fall foul where they outsource any aspect of their operations to emerging markets where such labour laws either don’t exist, or aren’t strictly enforced.

Read more in our Professional Paraplanner article here.