6 minute read
IS ESG AND RESPONSIBLE INVESTMENT SET TO ROAR IN THE TWENTIES?
As we begin the decade of the twenty twenties, is ESG investing set to roar? What exactly do we mean by ESG? How far have we come towards achieving greater standardisation of terminologies when it comes to ESG and responsible investing?
Advertisement
At the IFA Magazine ESG roundtable discussion which was held last autumn in London, participants kicked off the discussion by focusing on the terminology involved and looking at how ESG often seems to mean different things to different people. There is little doubt that offering investments which are driving change is seen in a different light now. This is no longer optional for fund managers, it’s a necessity.
Julia Dreblow is a specialist when it comes ESG investing. She runs her own business which is primarily focused on providing information on ESG or ethical investment funds. She agreed that ESG is often used as an umbrella term which covers a wide spectrum of investments which intrinsically pay close attention to ethical, environmental, social and governance issues.
Interest in responsible investment is clearly growing across the board – from the industry, policy-makers and regulators, investors and society at large.
Tackling it is a challenge which the Investment Association (IA) has already set about with some gusto. Back in November, the IA launched the first ever industry-agreed Responsible Investment Framework and supplementary definitions which aim to bring clarity and consistency to the way these products are described and to make it easier for investors to understand the opportunities it presents.
Ben Constable-Maxwell is Head of Sustainable and Impact investing at M&G Investments and is part of the M&G team integrating ESG into the overall fund management process as well as managing specific ESG focused funds. His view is that, from an investment perspective, ESG has shifted from something that was primarily around aligning people's values to something which focuses on those ESG factors that are material to the value of funds. As he summed up, “It has moved from values to value.” However, he was keen to stress that what motivates investors from a personal perspective is still an important driver and that the two factors shouldn’t be disassociated.
Julian Barnard, a one-man band IFA from South London, put a slightly different slant on it, seeing his role as interpreting what the client feels is ESG, and finding the solution that fits. Ethical means different things to different people, “...so it’s my job to delve into what they believe they want, and then try and match that up with funds which are out there. I need to find out whether what my client means by ESG matches up with what the fund manager believes.”
Adrian Mackenzie, a financial planner and director of Whiting & Partners, took a similar view.
“You have to take into account how strongly they feel, whether clients want to be prescriptive about what they invest in or just want to feel like they’re doing some good. We find there’s more of that nowadays, they don’t want to limit their investments but want to know they’re making a positive contribution.”
The panel were united in recognising the need to “look under the bonnet” of funds. It’s all very well to tuck “ESG” away somewhere in the marketing blurb, but as Michael Daniels, director at Kingswood Consultants said, “What investors are looking for is honesty, integrity and ‘it does what it says on the tin’. You don’t want to expect vanilla and get raspberry ripple, it needs to be clear what the fund is providing.”
Julia Dreblow referred to Fund EcoMarket, a free-to-use database that she runs which has about 100 different criteria with regard to ESG, observing “There’s nothing more dangerous for an advisor than finding they put someone into a fund that doesn’t do what it says on the tin.”
Transparency is crucial, according to Ben ConstableMaxwell. “The development of ESG has been a necessary and really great development, but it’s come with some challenges. One of the challenges is that it’s a bit of a hot topic and I think there's potential for greenwashing, with the marketing spiel occasionally overclaiming what goes on in reality. So, I think our industry has a responsibility to get this right. Transparency is the best medicine, so we need to be clear what’s in our fund, what it’s intending to do. It’s good to have a fund strategy that pushes for improvements; pushing for change is a valid approach, you just need to be transparent. With impact funds transparency is one of the core principles. We must be whiter than white as we are mindful of the risks of being accused to greenwash if we don't do it properly.... Open dialogue with customers is important to understand what they want from us and ensure we live up to their expectations.”
Michael Daniels agreed, quoting the example of an environmental fund fronted by a celebrity scientist which, it later transpired, had been linked to the killing of bats.
Wayne Bishop, CEO of King & Shaxson Ethical Investing, gives advisors questionnaires to take a human belief system to something that’s tangible and usable. “When you talk to people about ethics and their ESG beliefs and the impact they want to have, it does vary. Having a process, a questionnaire, or talking it through will give you an idea of how to take it forward.”
“We have a policy that 3 people look at a fund. I like to be cold and unemotional when I look at something; my colleagues will tell me why the client believes in it. You get different people looking at it differently. One of the hardest things for an advisor is that you have to engage and have an honest conversation, we then have to assess that.
“I’ve learnt over the years, to only look at what they do, not what they say, and I look straight to the holdings. We also constantly monitor. With Shell, they took over BG which was quite a clean energy company but when Shell took over they were at the other end of the spectrum and we found most funds disposed of Shell very quickly. Fossil fuels has been one of the biggest changes in the last 10 years. 90% of people don’t want to go anywhere near fossil fuels, it’s been a real shift in behaviour. One of the hardest things is maintaining the ethical dialogue as there’s a sense of fashion and fluidity in it.”
Harry Merrison, Investment Manager at Kingswood Investment noted that with regard to oil and tobacco, “Ethical indices have outperformed the main markets. I know you’re getting a big yield but at what cost? Arguably ethical investment can be considered less risky – why wouldn’t you want to invest in a company that’s good for the environment, society and well governed? They’re better custodians for investor capital longer term.”
This steered the discussion to ESG and the risk implications, which we report in the next article.
