THE SUSTAINABLE INVESTMENT DEBATE

Is sustainable investment simply the latest trend or is it a factor which is set to become mainstream? Brian Tora considers the evolution of this increasingly important element of the investment process

The investment industry loves acronyms and using initials, rather than spelling things out properly. The benchmark UK index, the FTSE 100, is nearly always referred to as the Footsie. Savings vehicles like PEPs and ISAs might well contain an OEIC (pronounced oik), while IFA is seldom written out in full. Jim (now Lord) O’Neill is credited with producing the term BRIC to represent the larger nations of the emerging market (EM) world while he was at Goldman Sachs and now we have the second-tier countries – Mexico, Indonesia, Nigeria and Turkey – or MINT.

A new set of initials has become very popular of late – ESG. Relating to a measure of how potential investments should be considered, these letters – as IFA Magazine readers will no doubt be aware - are short for Environmental, Social and Governance. They are increasingly being used by the professional investment community to demonstrate that they are taking important issues into account when constructing portfolios. This is all about social responsibility rather than performance. It does not really compare with the trend for ethical investing several years ago when managers sought to demonstrate that a good performance did not depend on buying shares in industries such as armaments and tobacco.

SUSTAINABILITY AS A DRIVER

The main focus appears to be on measuring the social responsibility of the companies which managers select to include in their portfolios. With so much focus now on climate change, waste management and maintaining a sustainable environment, how companies are dealing with such issues is becoming an important part of whether they are suitable for inclusion in a portfolio. Many fund management groups have appointed sustainability officers to oversee the stock selection process. And a whole industry has grown up around measuring the appropriate metrics and feeding the information back to managers.

This is not a simple process. Indeed, in a recent video released by a leading US fund group, the lack of sufficient data was highlighted, as was the need to broaden the scope of those businesses that needed to be monitored. And in a significant diversion from the original ethical investment scope, bonds issued by companies considered

With so much focus now on climate change, waste management and maintaining a sustainable environment, how companies are dealing with such issues is becoming an important part of whether they are suitable for inclusion in a portfolio

to be ESG friendly are now in the mix of available assets. Indeed, amongst the many emails I have received recently regarding ESG investing, the launch of an Exchange Traded Fund invested in the bonds of suitable companies was an offer that the managers clearly thought would be attractive to investors.

IS IT INVESTOR DRIVEN?

For the most part I doubt that it is - certainly as far as the retail investor is concerned -though there will be large pension funds that will clearly take such an input into their portfolios very seriously. In some measure ESG investing could be considered as little more than a sophisticated lobby group to make less compliant companies change their approach to sustainability. It is certainly not about finding wind farms, solar panel manufacturers or green waste disposal companies in which to invest. But fund management groups will be keen to emphasise that they are seeking to improve corporate behaviour.

INFORMATION IS POWER

There are now training courses available on ESG investing. Major groups, like Federated Hermes, the combination of Pittsburgh based Federated Investors and our own Hermes, which manages amongst others the Post Office pension fund, have put out significant research on how ESG compliant companies might affect portfolio performance. Let’s face it, complex algorhythms allow those with a mind to justify a particular approach to investment to slice and dice data to arrive at interesting, but not always useful, conclusions. Don’t get me wrong. I’m far from being against ESG investing. Indeed, more focus on how we build a sustainable planet must be a good thing. Those television images of waste plastic disrupting our sea and river life and the apparent melting of the ice caps are issues we all need to be concerned with. And ESG is about more than these major worries. Gender balance, treatment of employees, executive pay – all might fall into the matrix that managers will be taking into account as they choose the companies to back.

I’m not sure all this will have any impact on portfolio performance, but it just might turn out to be a force for good. It may even become a necessity if investors start insisting that the managers of the funds in which they invest adopt a sustainable approach. The climate change protests demonstrate that there is a growing concern over how we look after this planet of ours. I expect to need to learn more about ESG investing as time goes on.

Those television images of waste plastic disrupting our sea and river life and the apparent melting of the ice caps are issues we all need to be concerned with

GOING VIRAL

Meanwhile, there have been other issues to occupy my mind at the moment as I sit down to write about sustainable investing. The coronavirus has seized the news headlines and dominated investor sentiment for weeks now. Such has been the volatility this outbreak has engendered that trying to report on how it might affect market behaviour, knowing that a few weeks will intervene between my assessment and you reading this, is clearly pointless. It could turn out to be a major contributor to economic performance – or perhaps it is already history. I hope the latter.

Brian Tora is a consultant to investment managers, JM Finn.