Everyone’s mad for the fund management industry’s favourite acronym, ESG, short for environmental, social and governance investing. More than $4bn was shovelled into funds claiming to focus on it in the UK last year. New funds based on the idea that investing comes with various levels of governance responsibility are appearing all the time.
You’ll want to be in on this. All portfolios should at least nod to the idea that there’s more to life than short-term profits. But how?
You can make it easy. At the simple and old-fashioned end of the ESG spectrum is the idea that you can exclude the big baddies and be done with it. So perhaps just don’t buy big oil. No Shell and no BP.
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Excluding the obvious big polluters is not enough
But think on and you might start to feel that’s not enough. After all, if you aren’t mad for oil, maybe you shouldn’t be mad for the companies that create demand for fossil fuels. You’d better not hold anyone that makes tractors. No Deere & Company. No Caterpillar. Same goes for aerospace firms, airlines and airports.
Following on from that last one, if you can’t hold an airport operator you really should knock out all companies which might exploit the people travelling via airports. Goodbye WHSmith, Ted Baker, CK Hutchinson Holdings (owner of Superdrug) and all luxury goods companies. Oh, and Mondelez International (maker of Toblerone, 25% of which is sold in airport duty-free shops — very often to me).
Think, too, about something such as pornography. I don’t think I much want to invest in porn. But you know what? Porn is really popular — and widely distributed by an awful lot of the companies you think are just fine ESG-wise. If you don’t want to be invested in adult entertainment, do you want to be invested in Google or mobile phone firms (around 80% of porn is watched on mobile devices)? Just asking.
This isn’t easy. Grappling with it means you are either going to have to drive yourself mad with the inconsistencies inherent in your approach (such as owning a car but refusing to own oil companies), hope the state takes on the responsibility for you (the Financial Conduct Authority has just announced proposals to improve climate-related disclosures by listed companies, for example) or outsource your morals to someone you have some trust in.
ESG and the world of fund management
It’s familiar-sounding rhetoric. But look at the industry as a whole on gender diversity. In 2000, 14% of fund managers were women, says Morningstar. Today, 14% of fund managers are women. There are lots of reasons why women might not want to be fund managers but it’s just a little hint at the gap between talk and walk in the fund management sector.
So with that in mind, here’s your ESG choice. You can buy a fund with one of the following buzzwords in its title: ethical, impact, socially responsible or just ESG. Otherwise you can find a fund management company that has an acceptable ESG-process embedded in its systems and buy any of its funds.
Consider a firm that insists on the proper treatment of all stakeholders connected to its investments (employees, customers, taxpayers and suppliers), keeps watch on the sustainability of, say, their water use and also takes an active approach to helping them improve.
In the end, your hope is that there is no obvious distinction between the ordinary funds these firms run and any other fund with an explicit ESG policy embedded in it.
Some ESG funds to consider
If you go for the former you will not be short of options. You can go for an active fund that just tries to be a bit more responsible than most (perhaps Fundsmith Sustainable Equity or Unicorn Ethical Income) or one that tries to invest in firms that will improve the world, maybe Pictet Global Environmental Opportunities or Montanaro Better World (I sit on the board of a Montanaro fund, though not this one).
You can go a step further than this and invest in the super-woke new CPR Invest – Social Impact, a fund as “dedicated to tackling social inequalities” as it is to helping you out with your personal urge to have a bigger Isa pot than everyone else.
Finally, you could take a more passive route and choose one of the many exchange traded funds (ETFs) that exclude various types of sin stocks. Interactive Investor has a useful list of funds with an ESG bent — the ACE 30. On it is one I hold, Impax Environmental Markets, and one that I will get around to holding at some point, the L&G Ethical Trust.
If you go for the latter approach it’s a matter of working out which firms are less awful than the rest of them. This is not a sector that regularly covers itself in ESG glory. Maybe they have signed the UN-backed Principles for Responsible Investment initiative. Or perhaps they just have a convincing ESG policy note on their website and no record of obviously awful behaviour.
Stewart Investors is hugely orientated towards sustainability, so any of its funds would suit. The Pacific Assets trust, which I hold, or GEM Sustainability funds are both good. The same goes for Impax Asset Management. L&G also appears to have a good corporate ethos, as do Baillie Gifford (I sit on the board of a trust it manages), Pictet and Hermes.
Beware the downsides of ethical investing
A few caveats to all this. Do-goodery is compelling. Just like you, I want to have ESG embedded in my Isa portfolio. But there are downsides. First, valuations. Are you prepared to pay extra for explicit ESG? Companies that are very obviously focused on the bandwagon aren’t cheap. Some prices, says Graham Clapp of investment manager RWC, are “echoing the bubble of the late 1990s”.
Second, there could be an exclusion penalty. Whatever you do, you are knocking out part of the market. There is plenty of find-the-answer-you-want research that will tell you that avoiding the dirtier parts of the market will make no difference to your returns. But cutting the diversity of portfolios does make a difference. In 2019, more than 80% of global power consumption was still derived from fossil fuels, for example. That’s quite something to decide you want nothing to do with.
Finally, you might want to worry a little about greenwash overload. Even in the course of writing this column I have read so many smug platitudes I am suffering from an almost overwhelming urge to spend a few hours gambling, smoking, boozing and binge sugar-eating, possibly in the passenger seat of a speed-limit-smashing, diesel-powered Shogun.
• This article was first published in the Financial Times
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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