“The end of the world is nigh”
The end of the world is nigh, unless we let the hippie generation (now decision-makers as asset managers and a big influence in government) take control. Let them restore the hippie spirit of peace and a more natural lifestyle and save the planet at the same time. Therein you have ESG in a nutshell. “Love” not so hot as in the ’60s but “sustainability” is the new word in the hippie lexicon.
For many investors, this “ ESG” (Environmental Social Governance) “thing” has sprung from nowhere. Up until 2020 investors had a choice of not worrying too much about the planet's end after all we had a “stable genius” called Trump denying climate change. Here was a chap who knows more than most-i.e., the injection of disinfectant and UV light for the treatment of COVID. Simultaneously, he was in charge at the White House. At the other end of the scale, scientists are peddling facts like the “Doomsday Glacier” diminishing in a fashion that suggests peril for humanity. This is Thwaites Glacier in Antarctica which, in the event of a total collapse, would add three feet to global sea level. Great for dolphins.
For those practicing Richard Attenborough impressions and seeking Climate Change insight- this link might help: https://www.bbc.com/news/science-environment-47976184. In a nutshell, Attenborough surmises we might have a decade to make a change or, “we could face irreversible damage to the natural world and the collapse of our societies”. What do decision-makers do? Listen to the scientists or stick with Trumpism and his “windmill wisdom”. ESG- Don Quixote or not?
We asked our herd: ESG- Is it a temporary fad? To what extent is it influencing investment decision making? Our first reaction was from Glyn Owen, Investment Manager at Momentum Asset Manager, who I happen to know went to India during the hippie period, but more relevantly noting “ESG was gathering momentum before the pandemic but during it, it has taken off. We were rarely asked about it by clients a couple of years ago but there is hardly a meeting that goes by today without questions about it.” Owen’s colleague, Lorenzo La Posta reflects The Herd view below “ ESG is here to stay. Understanding the financial impact of ESG issues is no longer optional” “ A good time to ask for a status report.
THE HERD AND ESG.
Our centre stage from The Herd, belongs to Daniel Jolliffe at Quilters Cheviot, not least because he has troubled himself by passing the CFA UK Certificate in ESG Investing. He will have seen the song-sheet- he starts with: “ The short answer to whether ESG is a temporary fad is absolutely not. Quilter Cheviot began considering ESG (environmental, social and governance) factors formally within its investment process over five years ago. As part of this approach, Quilter Cheviot, as part of Quilter plc, is a signatory to the United Nations backed Principles for Responsible Investment (PRI). The PRI is a global organisation whose purpose is to understand the investment implications of environmental, social and governance (ESG) factors, and to support its investor signatories in incorporating these factors into their investment and ownership decisions.” The full text of Jolliffe’s reply is at the foot of this article and is a very useful overview.
Phil Smeaton (VAM- Sanlam) , might have been a few years post- the hippie high spot and provides a highly practical point on ESG- that they must do what they (as asset managers) are told: “While the explosion of ESG may be part of a generational culture shift towards a more conscious way of investing, we would also argue that far from being a fad, it is a permanent regulatory change. Fund managers are now being told by the government what is ethical, and they have to abide by the ESG rules and associated disclosures. For people who are already doing the sensible thing and considering all aspects of risk and sustainability before they make investment decisions, this simply represents an additional administrative burden in documenting how they have considered these rules. So whilst it may seem like asset managers have chosen to don daisy chains and peace signs all of a sudden, most are merely complying with the law while a cottage industry of very vocal advocates has also sprung up to opportunistically offer new “ESG services” for a fee.”
At Momentum Asset Managers, Lorenzo La Posta, is also firm in the belief that “ ESG is here to stay. The hype around it might fade away, but the materiality of some ESG considerations is undeniably important for and permanent within investment decisions.” La Posta echoes Smeaton’s views that enforcement will assist the push: “We have seen a huge proliferation of ESG-focused and Sustainable funds over the last few years (not without some “greenwashing”) and not everyone agrees on how “ESG investing” should work. However, one undeniable element is that increasing regulations and shifting customers’ preferences are (and will be) forcing companies to adapt to a world that is more mindful of environment and societies. Understanding the financial impact of such changes is no longer optional.”
The rest of Daniel Jolliffe’s view is attached here: “Responsible investment incorporates a number of different approaches including stewardship (voting and engagement), ESG integration (considering ESG factors within the investment process) as well as sustainable investment such as the Quilter Cheviot managed Climate Assets Fund, which focuses on investing in companies that will benefit from climate change, resource scarcity and population growth.
“The governance (the G of ESG) was historically the area that investors tended to focus on the most. Governance remains incredibly important and the recent voting season in the UK, for example, has seen a raft of significant votes against remuneration resolutions, and the message being sent to companies is very clear: shareholders are not going to let you get away with discretionary pay decisions (which only seem to be upwards in nature) in the current climate.
“Significant focus has been given to climate change within the E element of ESG, as it should be with the significant global challenge of achieving net zero by 2050. Investors have a choice on whether to divest or engage. For us as an investor, it is critical to evaluate how companies are tackling this challenge. Some will of course be faring far greater than others.
“The current phase is about engagement. Understanding how companies are planning their climate transition and how the steps are being put in place to meet the 2050 target. You could of course, simply decide not to invest in the oil sector as an example, but our perspective is that by doing so you are simply kicking the problem down the road. Shareholders need to be a part of this change and the danger becomes that the capital is held by people who don’t care and won’t engage for change.
“The S of ESG has sometimes been seen as the poor relation to the E and the G. However, over the last year or so this has come to the fore as working conditions and the general treatment of employees during the pandemic has highlighted a number of concerning issues.
“Responsible investment is here to stay. But we perhaps need to re-focus attention slightly as the focus in the media is perhaps over-shadowed by what investors are actually doing. Essentially, our investment analysts strongly favour well-run businesses or funds, which have strong management teams that aren’t afraid to adapt to and implement change. Identifying and evaluating the ESG challenges and opportunities within this is simply good business.”
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