Over the past few years, the growth in ESG investing has been exponential.
Increasingly, more investors are interested in how they drive positive change, as well as (not instead of) make money from their portfolios.
Indeed, recent research from the Financial Conduct Authority shows 81% of adults would like their money to do good as well as provide a financial return.
However, an ESG backlash is well underway, intensifying in impact and significantly threatening the continued growth of sustainable investment.
People look to ESG investing to deliver positive change as well as investment returns. However, its record of doing this is mixed, at best
We are seeing this through culture wars in the US prohibiting asset managers from integrating ESG in some states; in proposed changes to UK company listing rules that could disenfranchise investor stewardship; and at high carbon businesses doubling down on their traditional business models despite longstanding investor engagement to the contrary.
This is all whittling away at ESG. But it faces another, much more serious, problem – it is not delivering what people want.
People look to ESG investing to deliver positive change as well as investment returns. However, its record of doing this is mixed, at best. The industry hasn’t focused enough on outcomes and this must change if ESG is to become something meaningful again.
ESG isn’t dead yet but it needs to look at itself if it is going to survive and we do need to build something better.
This approach risks narrowing the investment universe to such an extent you can only invest in overinflated or ESG bubble stocks
One issue is that many ESG approaches are very portfolio centric. The reality is, very few companies actually set out to do bad things. However, in an unsustainable world, it is very difficult for a company to be sustainable, and therefore difficult for a whole portfolio to be built up of clean stocks.
Sustainability can often be marketed as a style of investing that only selects companies that are inherently ‘good’. This approach risks narrowing the investment universe to such an extent you can only invest in overinflated or ESG bubble stocks. And this won’t deliver in terms of real-world impact and can – due to the particular style of investing – place returns at greater risk of short-term market fashions.
This doesn’t necessarily mean investing in all companies – there are some industries such as tobacco that are never going to be made better – but our industry can and should use our financial weight to drive positive change.
Sustainable investors have a terrific opportunity to invest in a range of companies and try to make them better – asking the difficult questions, finding out where improvements are needed and pushing companies to change. Active ownership is, in our opinion, the most effective way to influence positive real-world outcomes.
Asset managers, along with advisers and consumers, all need to come together to actually implement and make this happen
The FCA’s introduction of the new Sustainability Disclosure Requirements (SDR) rules is a very good blueprint for delivering sustainable finance and provides great guidance to help us along this ‘sustainable improvers’ journey. But asset managers, along with advisers and consumers, all need to come together to actually implement and make this happen.
That’s why we recently launched AdviserAction to facilitate advisers’ engagement with listed companies to drive sustainable outcomes. Advisers have played a key role in promoting the development of sustainable finance, but the structure of the industry has made engagement with investee companies almost impossible.
Let’s look at mental health as an example. According to data in The Lancet Global Health, an estimated 12 billion working days are lost globally each year to depression and anxiety alone, at an annual cost of $1trn in lost productivity. This means mental ill-health has become a material financial issue for investors.
Modern ESG needs to be all in
Research shows, however, that for every $1 invested in scaled-up treatment for depression and anxiety in the workplace, there is a $4 return in better health and productivity (Lancet Global Health). If companies don’t accept this, they are ignoring, and potentially continuing to contribute to, the problem.
Investors clearly have a key role in driving this awareness and action – not just with mental health but with any number of systemic issues that affect the companies they invest in. Investors must be proactive in identifying sustainability risks across their portfolio holdings, and not held back due to concerns around potential controversies or inaccurate information. This attitude just creates yet another barrier to progress.
Finally, it has to be the investment management firm rather than just the product that is sustainable, particularly when investors have change at the centre of their ESG strategy. When pursuing active ownership, it doesn’t work to have one fund pushing for net zero and another that invests in coal, for example. Modern ESG needs to be all in.
James Corah is head of sustainability at CCLA Investment Management
How is it that research (what research?) from the FCA (allegedly) shows that a huge majority of adults (who else?) would like their money to do good as well as provide a financial return, whereas financial advisers who are at the actual coalface dealing directly with investors report an equal majority who have very little real interest in or indeed even awareness of ESG?
In practice, I suggest, whilst environmentally and socially responsible investments are commendable aspirations, most investors will always accord higher priority to achieving positive returns.
No, it’s not dead, but it was never quite as alive as the hypers, virtue-signallers, and snake-oil salesmen wanted us to believe. I’ve heard hundreds of ESG pitches in the last 30 years, and 99% of them were complete tripe.
Was it ever really alive? A Fad with no real grounding in basic investment principles. To plagiarise Harry Truman ” A doctrine fostered by a delusional illogical minority and promoted by slick PR, which holds forth the proposition that it is entirely possible to pick up a piece of effluent by the clean end”.