Are equity investors really making a difference to planet?
11:00, 26 November 2021
The recent COP26 conference highlighted (if it needed highlighting) the urgency for climate action. The call for investment in ESG-focused (environmental, social and corporate governance) companies continues to gain momentum – one of the reasons ESG funds have moved from niche to mainstream in recent years.
But as Andy Merricks, fund manager at 8AM Global points out, the enthusiasm with which the fund management industry has suddenly discovered that it can ‘make a difference’ appears to be closely aligned with the commercial realisation that it risks missing out if it doesn’t have a sustainable offering.
“Virtually every fund manager that talks about their sustainable fund explains that they engage with the management of the companies that they meet with and try to encourage them to run their businesses for the benefit of people or the planet, either through the way they operate or the products and services they provide.”
This is fine and commendable, he argues, but goes on to point out that these same fund management groups invest just as heavily in what would be deemed unsound stocks from an ESG perspective in some of their largest equity funds.
Merricks took a random selection of fund management groups that offer a sustainable fund and ran a cursory glance over the top 10 holdings in one or more of their UK equity funds.
“Every single one of them had one or more of the following companies in their top 10 lists: BAT, Imperial Brands, Philip Morris, BAE Systems, BP, Royal Dutch Shell, Rio Tinto, Glencore. I’m not an ESG specialist but these are not the types of company that I would expect to make the ESG cut ordinarily.
“To be clear, these companies were not in their sustainable funds but nonetheless it amounts to billions invested across the fund ranges in companies that they would exclude by way of their own screening criteria.”
He suspects their argument is that they are providing choice for investors who want or need a global energy fund or maybe an equity income or Alpha-style fund. “This is absolutely commercially understandable, but it’s probably best not to come across as holier than thou in those funds that are being run for the ‘benefit of people or the planet’.”
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Loose ESG screening criteria
How wide a remit sustainable funds have in allowing or disallowing investment into certain companies is another big concern for Merricks.
He says too many asset management companies point to thresholds applied to revenues that companies can derive from unsustainable or unethical activities (tobacco, gambling, fossil fuels, intensive farming), which so long as they satisfy, means they qualify for inclusion in a portfolio.
“I may have read this wrong, but it appears to be saying that companies can make money from unsustainable and unethical activities, but not too much. It sounds a bit like telling a burglar that they have to give all the goods back that have been stolen… well, most of them.”
Merricks concludes: “I am all for ESG considerations – which normal person wouldn’t be? It’s just that the new-found enthusiasm for ESG from virtually every fund group that has a fund to sell comes over as a touch disingenuous.”
Sector specialists provide deeper insight
Rachel Whittaker, head of sustainable investment (SI) research at asset manager Robeco, is concerned that when it comes to ESG investing, fund houses are not viewing specialist analysts as a necessity, when they should be.
“Many of our peers still treat SI research as a support function, but our SI research team contains both sustainability and sectoral specialists. It has become common practice for traditional equity and credit analysts or portfolio managers to say that they integrate ESG, but in practice, no one’s an expert on everything and the idea that one person can know everything they need to know about every sector, every asset class or every ESG topic is unrealistic.”
Whittaker adds that having a team of sustainability and sector specialists allows the time and expertise to gain deep insights into the non-financial issues that are driving the profitability and opportunities of an industry in the future.
David Czupryna, head of ESG development at Candriam, takes a similar line. “Does SI require technical and sector expertise? The answer is yes. That is why at Candriam our ESG analysts are organised by sector and broad ESG thematic. The more complex and technical ESG matters are, the more critical ESG analysts bring the right knowledge. And in terms of environmental challenges, for instance, the technicality of the topics makes such knowledge essential.”