Why investors should look beneath the ESG label
Anyone who has followed my scrawling for any length of time will know that I am somewhat sceptical of the current ESG craze in investing. Not sceptical of the idea that investment should be a force for good, that solutions are needed to make the world a cleaner, more socially responsible and better governed place, and that companies have a key role to play in this. But sceptical of how the ESG label has been applied willy-nilly in a way that has rendered it utterly meaningless in many instances (think boohoo), that the many scoring systems designed to assess the ESG-ness of investments are often conflicting and confusing, and that some people in the financial services industry are simply using it as an opportunity to squeeze a bit more money out of their customers.
ccording to data from platform AJ Bell, more than a third of flows into funds this year will go into sustainable investments, and much of that is coming from retail investors. That’s good in the sense that it shows people want their money to do the things that ESG promises. But not so good, in that their money might not be doing quite as much good as they think, and that they’ll have paid a high price for the privilege.
I say that, because ESG investments now often attract a significant premium to their not-so-sustainable cohorts. And while investors may be comfortable paying that premium, it is often the booming demand for the underlying ESG assets that has created it in the first place – a momentum trade that could easily run out of steam in other words. It used to be said that you had to sacrifice performance for ethical peace of mind, but that has not been the case this year as ESG-mania has launched many funds with the label to the top of the fund performance leaderboards. Among the winners so far is Liontrust Asset Management, which today reported further inflows into its Sustainable Futures funds. Its shares have more than tripled in the last two years as interest in ESG has grown and its profits have soared. Assets under management in its sustainable funds hit £13.2bn at the end of September, of which more than £12bn is held by retail investors.
I wonder how many of those investors have properly read the factsheets, though. A look at the holdings of its Sustainable Futures Global Growth Fund reveals a portfolio that looks very much like any other global growth fund, full of tech and payments companies. One holding that jumped out is the footwear company Puma – Liontrust argues its inclusion on the basis that it “enables healthier lifestyles”, but I’ll leave you to judge for yourself whether that’s a company contributing to a more sustainable future any more than a good walk would. Research from ethical fashion directory Good On You suggests that may be a stretch. Insulation supplier Kingspan is also in its portfolio – energy efficiency seemingly trumps a serious corporate scandal.
That’s partly why my simple view of ESG is that you should forget the labels and invest where your conscience is comfortable. Personally, I’m not keen on gambling as an investment and wouldn’t touch the sector with a 40-foot pole, but others may see it as a bit of harmless fun. And I can think of dozens of companies that may score highly in one area of the ESG spectrum but fall down on another – Diageo is a brilliantly well-run company, for instance, but at the end of the day it sells a product which most people can enjoy safely but which causes some people serious misery.
Indeed, dig deep enough and you can probably find something out about most companies that you don’t like, whether it be causing social and health problems, or using zero hours labour, or mining in conflict zones, or withholding safety information, or selling additive-laden food, or polluting rivers with sewage, or squeezing their suppliers, or overcharging customers for investment services, or avoiding tax. I could go on, and it would be great if companies could stop doing all these things – at least ESG is a step along that long road.
But I’d argue that it is G – for governance – that matters most, because I believe that a well-run company will automatically think about the environmental and social concerns in its decision making, simply because it is good business to do so. And I think one of the most obvious signs of good management is in restraint when it comes to their own pay and generosity when it comes to their staff, alongside the care with which they treat their customers and suppliers. Working this out should be part of anyone’s investment process, not just those that want the world to be a better place.