When people think about ethical investing, the focus is often on the ‘E’ in ESG – environmental concerns like renewable energy, carbon reduction and climate action. But investors should also be paying attention to the S (social) and G (governance) factors.
Understanding social and governance factors
Social – This covers how companies treat their employees, suppliers, and communities. It includes labour practices, human rights, diversity and inclusion, and community engagement. Companies with strong social policies tend to attract and retain talent, maintain customer loyalty, and avoid costly scandals.
Governance – This focuses on how a company is run. Key considerations include board structure, executive pay, shareholder rights, corporate transparency, and ethical standards. Strong governance reduces the risk of fraud, mismanagement, and regulatory penalties – factors that directly affect shareholder returns.
Why S and G matter
If you are approaching retirement, balancing growth with the possibility of losses is likely a priority. Poor social or governance practices can lead to financial losses, reputational damage, and market volatility. For example:
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Social risk – a company faces public backlash for poor labour practices, resulting in a decline in sales and stock value.
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Governance risk – A board scandal leads to leadership upheaval, fines and reputational damage, negatively affecting shareholders.
By incorporating S & G considerations in your investment decisions, you’re protecting your portfolio against these hidden risks whilst staying aligned with your values.
Integrating S & G into your portfolio
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Screen funds for S & G focus – look beyond environmental funds and choose portfolios with balanced ESG emphasis
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Diversify across ESG themes – Allocate investments across companies excelling in E, S and G to reduce risk
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Consult your adviser – Ask about social policies, board independence and governance oversight
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Step by step implementation – Start by incorporating one S or G focused fund, then progressively adjust your portfolio as you gain confidence.
Ethical investing isn’t just about the environment. By giving equal weight to social and governance factors, investors can protect and grow their portfolios while leaving a positive legacy. Take the time to review your current investments; you may discover opportunities to align your money with your values more than ever before.
It is important to take professional advice before making any decision relating to your personal finances. Information within this article does not provide individual tailored investment advice and is for guidance only. We cannot assume legal liability for any errors or omissions it might contain. Ethical Futures llp is authorised and regulated by the Financial Conduct Authority.