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Understanding ESG integration

We believe integrating environmental, social and governance (ESG) factors into our investment process helps to manage risks and can generate better outcomes for our customers.

What is ESG integration?

At Royal London, ESG integration is:

  • the systematic, explicit and transparent integration of material ESG considerations
  • built into our processes for investment research, analysis and decision-making.

For funds, ESG integration refers to the consideration of ESG risks as part of the investment process. It doesn't necessarily mean that the fund is committed to achieving a particular positive contribution to the environment or society.

 

How can you help your clients understand ESG in investing?

We know that some clients, when asked, are interested in ESG issues and how these are considered in their investments. But it can be a difficult subject for them to understand so we've put together a simple explanation you can share with them.

 

An explanation you can share with clients

Investments, like those in a pension or stocks and shares ISA, are often held in companies. So how these companies perform financially affects the value of your investments.

Poor management of ESG issues - such as impacts from and on the environment, or failing to support staff welfare - can create financial risks for a company. On the flip side, in some cases, a company considering environmental and other societal issues in its plans may be better placed to improve resilience and efficiency, increase market share and deliver returns.

This is why investment managers look at ESG issues when deciding where to invest money, alongside other areas that can affect performance. And it's part of the reason they encourage companies to improve how they manage ESG issues.

Examples of ESG considerations

The impact environmental challenges, like climate change and the transition to net zero (balancing the amount of greenhouse gases emitted into the atmosphere and the amount removed from it), could have on a company's ability to operate.

For example, companies could be at financial risk if consumer demand moves to low­ carbon options, or if changes in weather patterns affect the availability of basic materials it uses to make products. On the other hand, by coming up with environmental solutions, a company could experience stronger growth.

How a company treats its employees, suppliers and the communities in which it operates, and the resulting risks or positive impacts on its business. Human rights, health and safety, working conditions and equity (fairness) are key factors to consider.

How a company is run. Its measures to prevent fraud, bribery and corruption, how it approaches executive pay and the diversity of its board.

More information

Find out more about our approach to responsible investment.