A huge THANK YOU to everyone who has returned the rebalance agreement forms. These are a really important part of how we ensure we can deliver on your goals.

We have written plenty on the markets and this month we want to change tact and discuss the latest buzz word “ESG”.

May Spotlight – Give us a “E”, Give us a “S”, Give us a “G”…..what do you get….um not sure

Over the last couple of years, the buzz word has been “ESG”. It stands for Environmental, Social and Governance. In all the noise it is very easy to get confused and I am sure looking back at some of my blogs there has been some muddled thinking.

However, time has delivered some clarity, and what I am about to say may seem to go against current thinking!

Many people I speak to assume ESG means responsible / green investing, which in turn means exclusionary (so no “sin” stocks like tobacco, fossil fuels etc). In fact, I listened to Invesco the other day who claimed this was the case. When I challenged this, they acknowledged it wasn’t clear. And yet only a few days later another fund house claimed that ESG meant responsible / green investing.  

The issue that I have with this is that almost every fund house I speak to claims to have an ESG overlay within their process. If we take the view of Invesco and others, then this would mean that no-one will ever invest in “sin” stocks.

So, what does this all mean? I have argued for some time that the fund managers we invest in have used an “ESG” overlay. I see ESG as a quality overlay.

I challenged a fund manager who uses an “ESG” overlay as to why they held tobacco stocks. Their response was interesting:

“Tobacco is deemed as bad because of the impact on health, but the fact is that they exist. You can ban them but that creates an illegal trade. So, the leading tobacco firms are investing in reduced risk products, and one company sees a day when they no longer sell traditional cigarettes. If we get to that stage, then surely that is positive change.”

We can argue that a certain car company is revolutionising the electric vehicle market and is a trail blazer and therefore naturally is an excellent company. Yes, it is good for environment (although elements of the car are not) but the corporate governance of the company is questionable. Is that a good or bad company?

Sticking on the theme of transition to a more sustainable world, if we assume ESG is about responsible / green investing then it means that many of the companies needed to transition to this new world are excluded. In one of my blogs the concern I raised was whether these could end up in the private markets. If they do, what control do shareholders have on how they act?

Taking another example. We assume that mining is a “dirty” business. We have talked to a manager who manages a metals fund, and we challenged him on this.

He explained that the extraction of metals can be seen as negative for the environment, but to transition to a more sustainable world you need metals! They also explained that many mining businesses have ESG policies, some of the areas that they have invested in include hydrogen for heavy industrial machinery, use of electric vehicles and solar energy to power electricity. They also have strong labour policies in place. A perceived dirty industry but with strong ESG credentials!

Then we turn to oil, gas, and coal. The idea is that we turn this off today and rely on renewables. The day will come but it is not here yet. An electric vehicle is equivalent to two houses in terms of its demands on the grid for electricity. Governments must invest in the infrastructure if we are to reach this utopia. Renewables are not generating enough electricity to replace the traditional sources, and so we need to transition. We need the traditional resources, but we need these to run down.

So investing in Germany’s largest power supplier (who have 30% of revenues in coal) is not “bad” if the trajectory is right; investing in BP or Shell is not “bad” if the direction of travel is right and so-on. These companies, like miners, will have ESG policies and will be clear on what they are doing.

We could use many examples but the point is this ESG applies to all companies. How managers view ESG is subjective, and a manager could view a tobacco or oil company as good in terms of ESG compared to some EV companies where they view the “G” as poor!

We are not disputing whether ESG is here to stay but what we are saying is that we shouldn’t get confused between ESG and Responsible / Impact investing.

ESG is a quality overlay; this may include perceived “sin” stocks like tobacco, oil, miners etc, and the choice of the investments are subjective based on the managers own views.

Responsible investing will include the ESG overlay but will also have exclusions so this will exclude areas like tobacco, oil, miners etc. It is worth adding that some managers will include stocks which are transitioning to a cleaner world.

An example I recently challenged was Tesco’s. In this case the manager explained that the company is making significant inroads in waste management, recyclable packaging and making plant-based food more affordable. The point is even with responsible investing there are going to be question marks and challenges on what managers hold.

If we go one step further, we enter the realms of impact of investing. This has ESG, responsible (exclusions) in the mix but looks further at the impact that those products are delivering. This could be social housing, it could be better water management, renewable energy, recycling, alternatives to plastic etc.

If we consider our mainstream portfolios the majority of the holdings will fall under ESG, but we may have some responsible and impact investments where we consider this appropriate. Within our positive portfolio impact portfolio, it will be a mix of responsible and impact investments, and therefore will have exclusions.

In summary, we shouldn’t get confused by the term ESG if we see this as a quality overlay. Within this we must understand that a managers view of ESG is subjective and what one person considers to be okay, another may not. If we want to exclude certain areas then this is not ESG on its own, this is either responsible or impact investing.

There is no right or wrong way. We have clients who only want positive impact investments, others who blend with the mainstream portfolios and others who just want the mainstream portfolios. We know that whatever route people select they don’t have to compromise returns to achieve their desired outcomes.

Tracking the market

In the last week of May we saw a slight recovery. Bitcoin has continued to slide down with the only positives this year being Oil, Gold and the FTSE 100 (just!).

 1 January 202231 May 2022Increase
Bitcoin USD47,686.8129,970.69-37.15%
Crude Oil76.08112.51+47.88%
S&P 5004,796.564,101.23-14.50%
Stoxx Index489.99440.33-10.13%
FTSE 1007,505.207,533.00+0.37%
Hang Seng23,374.7521,082.13-9.80%

Sources of data: CNBC, Yahoo Finance & Reuters

What is in, and what is out?

Nine of the top ten funds over 12 months are commodity based. The top three are – iShares Oil and Gas Exploration and Production +91.50%, iShares S&P 500 Energy Sector +89.40% and BlackRock BCG World Energy Fund +82.10%.

The bottom ten is a mix of internet-based strategies, emerging markets, and US. The bottom three are HAN Global Online Retail UCITS ETF -65.70%, BlackRock GF Emerging Europe Fund -58.70% and Liontrust Russia Fund -53.10%.

Sources of data: TrustNet

Talking shop with fund managers

We have completed over 70 meetings this year. Additionally, we have had various economic updates. Below we share some thoughts from these meetings. Some may contradict as these are views from different managers:

Looking to the future – BlackRock, Schroders, BMO, Abrdn

  • Corporate balance sheets are strong as are household balance sheets
  • This seems similar to the 1989/90/91 recession which was inflation driven
  • Inflation has many moving parts across energy and food, services (including shelter) and goods
  • If the price of goods is not coming down, then inflation is entrenched, and interest rates will go up
  • Watch the US housing market, 30-year mortgages are at 15-year highs, evidence that housing transactions are slowing, people can’t afford to buy, and people don’t want to move
  • Evidence that non profitable companies are showing signs of stress; cutting jobs, profit warnings and cash starting to dry up
  • It is the first time since 1969 where both bonds and equities have fallen
  • Shouldn’t ignore the cash held by consumers across the UK, US and Europe. Even if half was spent this could be positive for economies
  • Consumer confidence is falling across the developed economies
  • We have a tightrope to walk with so much uncertainty – Ukraine, China, Inflation, Monetary Policy, and Recession fears
  • Markets tend to reward quality during slowdowns

General disclaimer: The data has been sourced from external sources and although we have looked to ensure this is as accurate as possible, we are not responsible for data they supply. The view on markets is written in a personal capacity and reflects the view of the author, it does not necessarily reflect the views of LWM Consultants. Equally the views under talking shop are those of individual fund managers. Individuals wishing to buy any product or service because 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 because 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.