Investing in the future

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It was perhaps inevitable that as the profile of sustainable investing rose, it would also face increased scrutiny and some of the press coverage would be less than flattering.

Indeed, it may be no coincidence that it is the UK, with its hyper-critical newspaper culture, which has seen the latest outbreak of what you might call sustainable-investing scepticism.

Indeed the term greenwashing – often used by the mainstream investment industry to differentiate itself from the cowboys – is now being deployed against it.

This should be a concern not least because it comes at a time when the investment industry is encouraging sustainable investing, employing environmental, social and governance approaches and increasingly championing impact investing.

It could be argued that the broad, sustainable investing sector has a very strong case to say it is equipping itself with the approaches, research and knowledge needed to transform the economy. In some sectors, most notably energy it is already contributing to that transformation in a hugely significant way – and one that is often ignored by many of the current ranks of protesters and critics.

Of course, this approach was never going to be without those critics and indeed given the scale of the challenge never going to be achieved without a few stumbles and reverses.

However, in just the past few weeks, there have been quite a few of these reverses.

Arguably, it is the Sunday Times that has alighted on the weak spot – with the headline ‘The ethical funds that plough your cash into tanks, tobacco and Big Oil’.

The story and the challenge came from an SCM Direct report, an outspoken fund management firm managed by Alan Miller and Gina Miller, with the latter also famous in the UK for her Brexit campaigning.

Can big positions in sin stocks be justified?

What is interesting is that funds with various ethical and sustainable labels from both the passive and active worlds have somehow contrived to be holding very large positions in what would once have been called sin stocks.

Whether this is entirely fair is a matter for debate. Should a well-governed tobacco company, one which minimises pollution from its manufacturing processes and which treats staff and supply chain companies and farmers feature – in a ESG fund.

We suspect the woman in the street would say the answer should be no and indeed some ESG tilts do involve some screening out of tobacco as well.

We also know that it could very well see an oil stock included. Here the argument is little less clear cut if a firm is not only shifting to natural gas but also moving to swiftly to embrace renewables – though as GIM has shown with some of its recent stories, progress has not always been sufficient to impress all investment firms.

Clearly with ESG integration, it is a question of degree although if it escapes headline writers it may also escape many ordinary investors too.

Yet the storm has also embroiled Fidelity whose platform tools may have been indicating that funds were socially responsible when they were not. The problem is so significant that it has shut down part of its platform – a related story from the SCM research once again heavily covered by the Times.

The fund giant says that third party data provider may be to blame, yet we are not sure that would satisfy investors or indeed financial advisers who used the tools to help their clients.

We also have to question whether regulators will now be getting increasingly involved as well.

The UK Financial Ombudsman Service, in one recent decision, found for a investor partly on the basis that they had specified ethical investments, but they were offered a bewildering choice of funds in an update showing the top stock holdings, rather than the adviser screening out or actively recommending this kind of fund.

The compensation was a relatively small amount i.e. a refund of charges plus a few hundred pounds sterling for distress, but it doesn’t take a huge leap of the imagination to see how there could be increased complaints and even significant litigation in future.

What we would fear in the UK, and indeed globally, is a rather poisonous combination of investments not being deemed suitable because they do not meet investors’ expectations and a more general hit to the reputation of sustainable investing in a broad sense.

So what exactly is to be done? We think the investment industry including advisers, both institutional and retail, needs to raise its game in terms of delivering what they say they are delivering.

The approach has to be genuine and the research accurate. That means more due diligence of third party research and certainly less acceptance of green credentials at face value.

Yet we also need to understand why thing have gone wrong to date.

Get-out card for active management?

We believe the first issue is that there is a temptation for some active managers to view sustainable investing as a get out card to justify their active approach as much as their sustainable outlook. It could well be a strong argument for active, but any suggestion of greenwashing will knock that argument for six.

The second issue seems to be the use of careless labels in passive investing. The name of fund does a lot of heavy lifting when it is ‘bought off the webpage’. Maybe there needs to be a threshold before applying ESG factors becomes justification for actually sticking ESG in a fund’s name.

Perhaps the terms remain too loose, though too strict a taxonomy has its downsides as well not least in reducing the potential impact of this kind of investing.

We do think the three letters of ESG may also contain the seeds of a problem where a fund might focus too much on the G in particular. We are big fans of ESG integration across portfolios, but would urge caution that a fund firm or an adviser doesn’t get carried away in terms of the marketing material.

Finally we would acknowledge that none of this is easy – this is a huge and varied sector – and some parties will make mistakes. Indeed, for the most part all firms can do is ensure that their own house is in order.

Yet many sustainable, ESG and impact investment houses, make much of monitoring the reputations of the firms they invest in. It may be a case of physician, heal thyself. The last thing the sustainable investment sector needs is for the accusation of greenwashing to stick. It may be the last thing the planet needs as well.  

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