What's the difference between 'ESG' and 'Ethical'? Are they the same thing?

A thread...

Just like V neck t-shirts, neon sunglasses, and those weird carrot jeans with cuffs on the legs, there are trends that come and go in the investment world in terms of style and terminology.

And just like the above fashion items, some would say that referring to 'ethical' investments is about a decade out of date.

In the olden days, ethical investing was easy: to be an ethical investor simply meant applying values to your investments. Usually this manifested in avoiding 'sin' sectors of alcohol, tobacco, gambling, armaments.

As ethical investing became more popular however, investors realised a problem: ethics are subjective to those who hold them.

What's ethical for you might be unethical for me.

This was particularly problematic when offering 'ethical' products.

How could they be marketed as 'ethical' en masse given there were no set standards of what the 'ethical' nature of the product involved?

Enter ESG.

ESG is an attempt to bring more quantifiable elements to the area of ethical investing. This is partly by categorising ethical issues into Environmental, Social, and Governance (ESG) factors in order to easily identify mutual concerns between managers and clients.

On top of this, ESG products often quantify the influence they're having, particularly when it comes to 'impact investments'.

ie. an ESG product can say they've invested £X into a sustainable fishing business (Environmental)

Or

An ESG product has divested away from this X number of companies with no female representation at board level (Governance)

This makes it easier to understand if an ESG product really is delivering in regards to your own ethical values.

Ultimately, ESG attempts to define and quantify ethical values within its products.

Nonetheless, ethics are still subjective.

It is highly recommended that if you're investing in an ESG product then you make sure that you're investing in something in line with your own values and not just something with an ESG or ethical label attached to it.