Planetary boundaries are nine boundaries which define the safe operating space for humanity. Four out of the nine boundaries have already been crossed.
Just before COVID, Greta Thunberg visited Bristol and said “…we must continue, and we have to be patient. Remember that the changes required will not happen overnight”.
Over the last few years as governments have grappled with what to do, it seems as always the investment industry has seen an opportunity. ESG was being bounded around before and is now gaining momentum. But what does it all mean? ESG is about environmental, social and governance issues.
When we googled what it meant there were hundreds of options. Asset Managers are quick to claim that they are “ESG integrated”. But what is “ESG integrated”?
So many times we have spoken to people who say they don’t want an ESG fund. We ask the question why? And the answer will almost always be the same; they don’t want to restrict their investment choice.
Whether intentionally or not it seems that ESG can overstate the environmental aspects. ESG is fundamentally a quality overlay. It is not an exclusionary policy unless the manager specifically says this. What this means is that an ESG fund can invest in oil, mining, tobacco etc where this passes the ESG scoring system.
And this is the rub. We believe that there is a “scandal” waiting around this. For those wanting to change the world, a pure ESG fund is probably not offering that. This is misleading for clients and damaging for those true strategies that are helping to make change happen.
When we are looking for sustainable investments and there are very few tools which help us. It really is about digging deep to understand the strategy and what it looks to achieve.
Should we care? Who remembers the hole in the ozone layer? No-one talks about it but it is still there. Change has happened. The chart below shows it was at its largest in September 2000.
The chart below shows land temperature change.
Should it just be about profits, or should it be about the world we live in?
If you google legislation around climate change, the UK, US and Europe have all announced plans, and so whether we care or not, change is coming.
This cartoon sums up what happens if we do nothing.
Europe is probably ahead of many countries, where funds must fall into three categories:
Even within this you could argue that under Article 8 you might find an oil company that is promoting enviromental change.
The UK has its own rules which are set to come in.
These are not exclusionary and so the investor still needs to understand what is under the bonnet.
In such a difficult and confusing world, where products are being labelled in a certain way, it is important to remember the big winner will be the asset manager. For an investor the key is understanding what they want.
To transition to a clean world we still need the “dirty” stuff. It is not bad to invest in these companies if we know how the managers actively engage. This information is not easy to come by and needs to be paid for.
If we don’t want to invest in these “dirty” companies then we need to search out exclusionary strategies. This is not simple but strategies with “impact, sustainability and responsible” within the title are likely to have exclusions, but the deep research will still be needed.
So where does this all lead? ESG is a quality screen. By their very nature, companies which take their responsibilities for the environment, place their staff, suppliers and customers at the heart of the business and have a strong progressive management team will do be better than those companies which do not. So, the argument that ESG doesn’t add value is weak.
But we must understand that ESG does not necessarily exclude fossil fuels, tobacco etc. If investors want this then they need to seek out these exclusionary funds.
There is no right or wrong. We can invest in businesses that are helping the transition if we know the asset managers are actively engaging. Equally, we can exclude these businesses.
The danger that we have is that where we place titles on funds, it can be misleading and that it in turn erodes trust. At a micro level, change within the asset manager industry will take time. It is likely that investors could potentially be misled but ultimately change must happen, it is just whether the regulators and asset management industry are brave enough to make the client the centre of the change!
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