We have to appreciate that we are part of nature, we must work with nature; the environment is our lifeline.Lewis Pugh
I started work with investments over 20 years ago and even then, responsible investing was a possibility, but the opportunity set was small. One observation was that to invest this way, you almost had to forego returns. Fast forward to 2020, and the investment world is abuzz with socially conscious options.
Before we explore the shift, it is worth explaining that seven years ago, we were approached by a client to set up an Ethical Portfolio. This has been a journey of discovery for us. As recently as 2014, the fund range was still relatively narrow.
Discovering investments is still difficult, and each investment is different. When we carry out research, we may pull up one specific global sector as an example, and sift through all the funds in that sector. There are no systems from the main research houses which allow you to filter out responsible funds. The process is still labour intensive. In addition to this, there remains few tools available to check the level of social responsibility within a portfolio and the cost can be prohibitive. Finally as this is the latest FCA theme, there are several new offerings coming to market in many different “shades of green”!
The second observation is that the contribution from these funds to overall performance is very different to mainstream portfolios, and clients have not needed to accept lower returns. The portfolio has tended to do better in down markets (it falls less than the overall market), and when markets are racing ahead, it can lag slightly behind. But overall, the average returns are similar, and this is a vast change from 20 years ago.
For this blog I will explore these different “shades of green” what they mean and how we approach this method of investing. This should help explain why this is such a hot topic.
What is responsible (or green) investing?
There are many different views of what responsible investing is, and we often call this “shades of green”. Some are very light green (i.e., a token effort to look like a green fund), and some are very dark green (i.e., the outcome is very clear).
Our response is simply that it is about investing for good reasons, to create good outcomes for both society and the planet.
Aberdeen Standard Life (ASI) described responsible investing as falling into four camps (A, B, C and D), and we think this encapsulates best all the “different shades of green”:
A: This is simply about excluding investing in certain industries and sectors, with tobacco and arms being a good example of this. These types of investments are likely to be badged “Ethical”
B: This is about ensuring that the company is doing good, but is less concerned about what the outcome is. This has an element of “A” but is also likely to involve environmental, social and governance (ESG) at the heart of the process. These types of investments tend to be badged “ESG”, “Responsible” or “Sustainable”
C: This is about investing in companies that contribute to solving problems. They are going one step further than “B” because they want to see what the impact is of the product or service they invest in. These tend to be badged “Impact”
D: This is about taking a less ethically minded company and forcing positive change. This is more likely to fall under a mainstream investment and likely to include “ESG”
Taking our desire to deliver good outcomes for society and the planet, we look for investments across the first three (A, B and C). There will be exclusions, but they will have different outcomes and it is important to understand these.
It is worth considering 2 examples of underlying holdings:
Tesla – including this holding is impactful because it is at the forefront of battery technology, virtual energy platforms and the drive toward electric vehicles. This is good for the planet, and seems a perfect company to invest in.
However, some would argue that the supply chain, materials, and corporate governance suggest this should not be included and there are better ways to invest in the transition to electric vehicles.
So, for these reasons it may be included in some funds but not all.
NextEra – they create a positive impact on the environment as they are the largest solar and wind power supplier. However, they own a coal energy business and have recently purchased a similar company. The reason for this is that they want to take these businesses and transition them away from coal to renewable energy to improve outcomes for customers and the environment.
We see this as a positive impact business, but some would not invest because of the inclusion of coal, as they see this is as negative to the environment.
The point being that we as investors are open to what we are looking to achieve. We want to invest in those companies that are doing good. We know that some people may disagree, and we are prepared to challenge fund managers. We will not invest in ‘dirty’ businesses – such as oil majors like BP and Shell. These businesses may transition to renewables, but oil is at the heart of what they do. Their transition could take many more years.
In summary, the market is more opaque than mainstream, so we take a broad view and hand pick funds with positive outcomes. We also actively look to avoid light green funds.
Finding good managers?
This remains a journey of discovery. We are talking to more managers, and is in part a subjective thought process. Recently a large fund house asked if we would invest in their UK fund if they re-badged it Sustainable. My answer was no because I felt they were doing it for the wrong reasons, a good example of a light green fund!
On the flip side, I have spoken to a handful of managers who developed and manage impact strategies, where you can see the passion and desire in what they are doing. These are the managers with whom we want to invest.
It is, of course, not just about the management team, we must look under the bonnet and consider performance. We recently contacted each of our holdings to ask five pertinent questions and the answers they gave will be published on our website.
Despite the noise this remains an under resourced part of the market, and therefore knowledge will be key.
Over the last few months, we noticed a shift in people wanting to discuss responsible investing. This was an emerging theme before COVID, and interest has accelerated as a direct result. There is a greater focus on governance within companies, and the impact of actions on society and the world.
It was felt for many years that ‘greed was good’ and management could get away with anything. Poor corporate governance was less important, providing shareholders were well rewarded.
If we look at the Arcadia group, there was no doubt that corporate governance was poor for many years and eventually with other factors the business failed.
Boohoo is under massive pressure over the use of labour in the UK. Even though they do not actually get involved in the manufacture of the goods, they do control the supply chain. The founders of J D Wetherspoons and Sports Direct are both under scrutiny for their treatment of staff which all impacts the business and shareholders are no longer happy to ignore poor corporate governance.
We now live in an age where bad behaviour will be reported very quickly (often via social media) and the damage can be terminal. Large institutional investors who ignore toxic practices can be dragged down at the same time.
The younger generation cares. Sir David Attenborough’s The Green Planet, and environmental activists like Greta Thunberg, connect with young people who see what is happening to our planet. They want to see change and can put pressure on to make it happen.
Alongside the speed of information and the resultant ground swell for change, is action that has been and should be taken by Governments. The Paris Climate Agreement, EU Recovery Fund, UK ten point plan for a green industrial revolution, China’s Green Energy Plan and the future US ‘green plans’, all point to where Governments are placing their emphasis. The recovery in most economies is going to be via green infrastructure.
Finally on the regulatory front, fund houses/managers must report differently and financial planners must build responsible investing into the advice and review process.
The drive to save the planet, improve society and reverse inequalities is a multi-decade theme. It remains an under researched part of the market, but one with lots of opportunities. Many of the companies invested in are profitable and well managed companies. There is growing evidence that companies that do good things, will do well.
In summary, this is happening now simply because COVID accelerated the theme. The last twelve months have highlighted companies which treat staff poorly, as well as the need to bridge inequalities, and that time is running out for us to act. The momentum has increased and this will likely continue.
I recently listened to a talk by Lewis Pugh and when asked what we could do, he replied:
- Every purchase we make impacts our climate and is a decision about our future. Whether it’s something for our home or an investment.
- Try to make everyday changes each week, month and year to make us more sustainable.
- Speak to others and discuss what you can do as a group or community.
Pugh’s point was that we all have a part to play. His story is fascinating. He swam the entire length of the English Channel (328 miles), undertook the first long distance swim across the Geographic North Pole and swam across Lake Pumori, a glacial lake on Mount Everest. All the challenges look to highlight the blight of our oceans. It’s worth checking out his story.
We do believe that responsible investment is still relatively niche, this will change, and it will come into mainstream investing. The timeline is unknown but perhaps in five years the lines will be crossed. In the meantime we continue to focus on what we think remains untapped, but which offers investors something slightly different and an interesting way to increase diversification.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog, and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.