It’s hard to say what the trigger was for the rise in investor interest in ESG; but Sir David Attenborough’s Blue Planet 2, which aired its first episode in October 2017, seems to have been a major contributor.
Blue Planet brought the huge problem of plastic in the oceans to the world’s attention.
Film footage showing waste in the depths of the ocean made man’s impact on the natural world all the more tangible.
Perhaps it made people think more widely about their own impact and, more importantly, what they could do about it. ESG, of course, is not simply about plastic pollution – it’s about every aspect of our impact on the environment and society.
It’s about investing with the aim of having a positive impact, alongside generating a financial return, writes Tim Cockerill, investment director at Rowan Dartington.
Ocean acidification and deforestation
Wherever you look, the world is facing massive environmental and social challenges, most of which have largely been ignored by governments, business and the public, despite the growing warning signs and scientific evidence.
Climate change has been talked about for more than 50 years, global temperatures have been rising steadily and even if all CO2 emissions stopped today, temperatures will continue to rise due to the lag in the warming effect.
The population of the planet is circa eight billion and forecast to rise to 10 billion by 2050, the current population is already putting a huge strain on the environment.
A report from Cambridge University highlights some of the areas under major stress – marine fish capture, ocean acidification, water usage, energy use and tropical forest loss.
It is the surfacing of these concerns, as well as the realisation that action is needed now and that change is in our hands, that is driving the surge in interest in ESG.
Activism push
It is frequently said that the ESG agenda is being driven by millennials, and it’s fair to say that young people are very aware of the environmental issues the world faces.
The pressure group Extinction Rebellion is galvanising young people into taking action to fight climate change, and Greta Thunberg, the Swedish schoolgirl, inspired school children around the world to protest about the lack of government action.
Yet it would be unfair to say older generations don’t care about these issues, because many do.
Their focus, we find, can often be on inheritance, wanting to ensure that in leaving their wealth to their children and grandchildren, they also leave the planet in a better place than it is now – this is long term generational investing which can only work by adopting ESG.
A rose by any other name
Anyone who has worked in the investment industry for any length of time will know that environmental, social, governance, as a way to invest, has effectively been around for some while.
Over the past 25 years there have been various labels such as ethical, green, stewardship, sustainable and responsible, all of which can lay claim to having at least one foot in the ESG camp.
What’s different today, for me, is that ESG is an umbrella term for the above.
In basic terms it’s about the impact a business has on the environment and society (good or bad), but it also incorporates governance, which is about the integrity of how the business is run.
In embracing ESG the fund management industry is going through a quiet revolution.
The past two years have seen investment groups really get to grips with it, and although it’s fair to say that this embrace is felt with less passion by some than others, it is none the less significant and long overdue.
Two tribes
Broadly, I see investment groups falling into two groups.
There are those that look at the ESG risks a business faces, which includes fines from poor environmental management, or the mistreatment of employees for example.
On the other hand are those that see it as being about an economy that is changing, which needs to drastically reduce carbon emissions– an economy which is more circular; it’s about recognising that our current economic way of life is unsustainable and that we need to create a more equitable society.
A key part of this is engagement, which entails the owners of businesses (shareholders) influencing the way those businesses behave – insisting that they address unacceptable practices and pushing for better standards in all three areas of ESG.
In this way it can be far more effective to effect a real change as a shareholder than just standing on the side lines and shouting!
Put away the green paint
So, an investment business claiming that it has ESG credentials needs to do more than just treat it as another risk – this is simply greenwashing.
A process that has ESG embedded, acting with the intention of aiding positive change, is a very different investment process.
Understandably the approach to ESG varies, and it is only by understanding these varied approaches that decisions can be made as to what is suitable for your clients; and client requirements differ.
Underlying this is the need to be pragmatic.
It is not possible to build the perfect ESG portfolio, indeed even the concept of ‘perfect’ will vary.
But it’s usually possible to build portfolios that closely meet the requirements of clients who want their investment to have a positive effect on the environment and society, with companies that have a strong governance, while avoiding those with poor governance and activities with negative impacts.
Despite the many reasons to look at ESG investing, one criticism I still hear is that this approach means investors have to accept underperformance – but the evidence I see doesn’t support this.
Indeed, the industries of the future where investors will most likely see the greater returns, are surely those meeting the demands of the future and ESG is at the heart of this.
This article was written for International Adviser by Tim Cockerill, investment director at Rowan Dartington.
