I recently read an article in the Times that stated that ESG was dead: “Woke goes broke! £1bn pulled from ESG funds”.
If you google ESG, these are some of the headlines:
“ESG will be dead in five years”.
“ESG is beyond redemption: may it RIP.”
“Is ESG Investing Dead? Fund Outflows Signal Tough Times.”
“The Death Knell for ESG Investing: Why the End is Near”
The figures used by the Times were not incorrect, but there were two things that the article failed to understand. The first is “What is ESG?” and the second is the growth of responsible investing over the last three years and how this remains just a tiny part of where investors place their money in the UK.
What is ESG?
This chart shows the three pillars of ESG:
ESG is about sound investing and is a screen fund managers have used for many years. Why would an investor buy shares in a company that treats its employees poorly? Or one that has a poor safety record?
ESG is not necessarily “responsible” investing in its true sense. It doesn’t exclude companies or sectors unless the mandate for the fund explicitly states that.
Almost every fund in the UK will use some form of screening, and in many cases, this is now called ESG. So, if the Times article is correct, then it means that every single fund in the UK is finished, and that is not the case.
FTSE4Good Index
Taking this a step further. The FTSE4Good Index states:
“The FTSE4Good Index Series is a collection of socially responsible, ESG stock indexes administered by the Financial Times Stock Exchange-Russell Group (FTSE). The purpose of these indexes is to highlight companies that score highly in corporate social responsibility (CSR) measures.”
On the surface, one would assume this excludes companies.
This is the ESG Rating for Shell from Morningstar.
This is the ESG Rating for RIO Tinto from Morningstar.
Both score poorly, according to Morningstar. But, clearly, from the top-10 holdings, not according to the Financial Times Stock-Exchange Russell Group.
The top 10 holdings are:
This demonstrates that ESG is subjective, not exclusionary. It is purely an assessment by a fund house or rating agency as to the quality of a company and whether a fund manager will invest in it. Companies themselves must demonstrate their commitment to these areas, and that, in turn, makes sense.
What is responsible investing?
Taking out ESG as a quality screen, responsible investing simply excludes specific sectors (arms, gambling, fossil fuels, etc). These strategies fall under different names, whether responsible, sustainable, impactful, or ethical. They all have nuances, but at the heart, they are to exclude certain practices.
This is the table that the Times is referring to:
This shows how much came out of responsible funds in September 2023. However, responsible investments remain a tiny proportion of the overall investment in the UK. But the picture that the Times failed to paint was where it has come from. These are the figures for December 2020:
Investment into responsible investments doubled in three years. It has slowed over the last 12 months, but this doesn’t paint the same picture as the headline in the Times implied.
Manipulation of data
ESG sparks so much debate because there is a simple misunderstanding of what it means. This comes from all sides of the industry. Even in the business I came from there was confusion as to what ESG meant, and we were not alone within the financial adviser marketplace.
This plays to certain journalists with an agenda.
The facts are apparent. ESG, or quality screening, is a sound practice for any investor. However, a fund manager may invest in a company with poor ESG scores because they feel they can influence change. This makes sense; if we excluded fossil fuel companies, mining companies, etc., these businesses could fall into private hands, and there would be no outside shareholder pressure to change. Change can enhance shareholder value.
Equally, if we want to exclude certain industries, then responsible investing is the route to go down. It is not always straightforward, and understanding a fund manager's approach to responsible investing is essential.
Returning to the Times, investors have moved money out of responsible funds, but over three years, investments have doubled, yet they remain a tiny part of the UK investment universe.
Journalists must explain the differences rather than write spurious articles targeting a particular audience segment. Equally, financial advisers, industry bodies, and the FCA have their part to play. It doesn’t have to be confusing. There must be a consistent message.
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