With COP26 well and truly under way the world awaits the outcome of two weeks’ worth of intense discussions, declarations, promises and denials. Will it turn out to be a good COP, or ultimately a bad COP? Our children will be the judges of that.
There is certainly a touch of good cop, bad cop about the investment industry at the moment as well. Having attended a conference recently, the talk was all about sustainability. In fact, it was so much about sustainability that the only thing that couldn’t be sustained was the delegates’ appetite for yet another sustainable presentation.
The enthusiasm with which the fund management industry has suddenly discovered that they can “make a difference” appears to be closely aligned to the commercial realisation that they risk missing out if they don’t have a sustainable offering.
I’m not for a second suggesting that it’s not an important subject – of course it is – but I do catch a whiff of hypocrisy in some of the fund management pearl-clutching. Let me try to explain. Here’s a dictionary definition of hypocrisy:
Hypocrisy: the practice of claiming to have higher standards or more noble beliefs than is the case.
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, which is fine and commendable.
Now, it is important to reiterate here that I am not criticising any individual fund manager as they are well-intentioned in general, so I will not mention any companies specifically. However, when I heard about this “engagement” for the umpteenth time I did ponder the following question: How would the fund management group react if they were “engaged” in a similar fashion?
I 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 – British American Tobacco, Imperial Brands, Philip Morris, BAE Systems, BP, Royal Dutch Shell, Rio Tinto or Glencore.
I’m not an environmental, social and governance (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 the 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.
In short, would they pass their own ESG screening?
The argument, I’m sure, 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, which 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”.
Another thing that struck me was just how wide a remit the sustainable funds had in allowing or disallowing investment into certain companies. From a recent publication the following were stated as being criteria by which managers screened companies:
“We have thresholds on the revenues that companies can derive from unsustainable and unethical activities, such as tobacco, gambling and intensive farming, and still be included in our funds”.
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 most of the goods back that have been stolen.
Another example was this: “We exclude companies involved in tobacco, and exposed to coal over a threshold. We have full discretion and also exclude companies that do not comply with our ESG policy, such as companies involved in the production, sale, storage or services for and of anti-personnel mines and cluster bombs; and companies involved in the production, sale or storage of chemical, biological and depleted uranium weapons”
Maybe what I thought had been a wide range of society that I have encountered across my 30 plus years in this business has not been as wide as I’d imagined, because not one individual has ever said to me that “I’d like to go overweight cluster bombs and depleted uranium weapons in my portfolio please”. I may be naïve but they seem pretty obvious areas to steer clear of when investing one’s nest egg.
As a young Swedish activist said of politicians, so there appears to be quite a bit of corporate blah, blah, blah around when it comes to sustainable investing.
To repeat, I am all for ESG considerations – who 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.
As my colleague messaged me from a conference that he was attending only yesterday evening, “Who knew every group had been investing in ESG for the past 50 years with more than 10,000 analysts covering the sector, each giving them the edge.” Who indeed?
Andy Merricks is co-manager of the 8AM Focussed fund. The views expressed above are his own and should not be taken as investment advice.