The movement towards more sustainable investment opportunities in 2019 is driven by both big institutional investors and millennials, and this theme is reinforced by the findings of our recent survey of high net worth individuals. For example, when asked how important or unimportant it is that the companies and funds they invest in are responsible, 76% of respondents said this was important[1].
In response, we have introduced our own ESG Portfolio Service, to help our clients take a more responsible approach to investing, while still doing their best for their long-term financial security.
What does ESG stand for?
ESG stands for environmental, social and governance:
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- Environmental criteria look at a company's energy use, sustainability policies, carbon emissions, resource conservation or animal rights
- Social criteria examine a company's relationships with its employees and the communities where it operates
- Governance factors concern a company's leadership, executive pay, audits, internal controls, independence, shareholder rights and transparency.
ESG investing considers the above factors alongside traditional financial metrics, with the objective of creating a more sustainable investment portfolio. An example of this is last year when, despite better growth characteristics, ESG investors shunned Facebook in favour of Microsoft, due to the former's concerning ambivalence to subscriber data privacy and poor regard for shareholder rights.
Good returns or good works do you still have to choose?
Until recently, allocating capital was viewed as binary. You had to choose between philanthropy and profit you couldn't have good returns generated by doing good. Now the industry acknowledges that there is something in between: well-governed companies that put thought into their environmental and social mission. Some of these make a positive difference by solving real world problems; others are more focused on avoiding risks to their business model. Think of a seatbelt manufacturer preventing road deaths, or a drinks manufacturer making lower-sugar products.
The industry has responded positively to this trend:
- The amount of assets managed using ESG factors has more than tripled to US$13trn
- Exchange-traded funds linked to ESG indexes have tripled to US$10bn in the last three years.
ESG has more definitional rigour than terms like 'ethical investing' and 'socially responsible' investment portfolios. It is also more data driven, with companies reporting on areas like resource efficiency, employee training and board independence. Performance has been encouraging, as the graph below shows.
Every little helps at Tesco
Tesco's most recent results contained an interesting admission from the relatively new CEO, Dave Lewis. He argued that previously stratospheric profit margins could not be maintained at the same time as looking after suppliers, employees and customers. This stands to reason. You can make more money if you underpay your staff and suppliers, and overcharge your customers. His strategy is to aim for lower but more sustainable profits, and better relations with staff, suppliers and customers. Tesco's recent share price strength shows that the market agrees.
Most ESG funds rank companies against their peers, based on how well they have performed according to ESG characteristics. Take this example from the oil and gas sector:
- The Norwegian giant Statoil is ranked near the top thanks to its record of few spills and low emissions
- Chevron ranks near the bottom because of its higher-risk operations, including forced shutdowns in 2015 of a new US$54bn liquefied natural gas plant in Australia.
Slow and steady progress towards sustainable investing
This is an important point. Sudden shifts can be exciting but impractical, as they disturb the existing order. What's promising about the shift toward ESG investor opportunities is that interest in it is huge, but the mechanics are happening gradually, so things like portfolio diversification are not being upended. There is a push towards preferring investments in companies that score well on ESG, rather than an ideological purge of half the Dow Index. Sensible portfolio management principles like diversification have not been abandoned at the altar of moral virtue.
A key investment theme for 2019
We see ESG as a structural investment theme rather than a cyclical one. A combination of attractive performance characteristics and inflows into the asset class make it impossible to ignore.
- Our ESG Portfolio Service does not compromise our philosophy of investing globally and across asset classes
- It does not deviate from our belief that diversification is essential for both growth and wealth preservation
- Most importantly, it does not inhibit our ability to deliver the expected returns our clients need.
• For more of our investment ideas for 2019, visit our website.
[1]Survey conducted by YouGov on behalf of Canaccord Genuity Wealth Management. Total sample size was 500 HNWIs. Fieldwork was undertaken between 3 and 11 September 2018. The survey was carried out online.
Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.
The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.
Patrick Thomas
Investment Manager
Patrick sits on the firm's Portfolio Construction Committee, Fund Selection Committee and Alternatives Committee. He specialises in managing investment portfolios for intermediaries, trusts, charities and pension funds, specialising in discretionary mandates.
patrick.thomas@canaccord.com
+44 207 523 4988
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