While interest in environmental, social & governance (ESG) investing has been building in recent years, this has accelerated sharply since the onset of the Covid-19.
Nevertheless, Royal London Asset Management’s Mike Fox has questioned whether the pace of ESG adoption can be sustained.
Royal London’s Fox – the asset manager’s head of sustainable investments and manager of the £1.8bn Royal London Sustainable World Trust – said the industry needs time to catch up and better define what such broad terms as ESG mean lest they become diluted and lose their impact.
Fox has previously noted that Covid-19 had done more for ESG investing in the space of 10 weeks than in the prior 10 years. And as a veteran sustainable investor, he has seen peaks and troughs of engagement in this type of investment, but never as accelerated as it has been this year.
“It’s probably not healthy if it carries on accelerating at the same speed,” he said. “We need to pause and take a breath.
“What’s happening with ESG is great, it’s a removal of an anomaly that fund managers were considering but not accepting as part of the investment decision-making process.”
However, he said ESG is not the ‘silver bullet’ some in the industry believe it to be and because of that the definition has become somewhat convoluted.
“A few years ago, it used to mean something: a point of differentiation that was culturally and operationally hard to do,” said Fox. “Whereas now the implicit message from the industry is that it’s easy and we’re all doing it – which isn’t true.”
This has undoubtedly been the result of the accelerated rate of adoption of ESG investing, he noted. But while Fox worries about the pace of this, he believes the core principles will always hold true.
Source: Investment Association
He explained: “The fundamental premise is correct so we don’t need to worry about that but toning it down through a period of consolidation would really help.”
The issue lies in defining such broad, dynamic terms like sustainability and ESG, according to Fox.
“If you’re looking at emerging market equities, governance might be 90 per cent of ESG, because having proper corporate governance in emerging markets is so critical,” said Fox. “Whereas in a UK or European stock, the environmental aspect is much more important.
“There’s not the ability to apply a standard model, we believe, across every company in every industry and country in the world.”
The Royal London head of sustainable investments outlined that trying to sum up sustainable investing is akin to trying to define all growth funds in the Investment Association universe.
“There’s 250 growth funds in the UK and they’ve all got different processes and portfolios – but they’re all growth funds,” he said. “It’s the same for sustainability, you have a common starting point but then very different manifestations.”
However, he conceded that it’s a good thing for diversity and choice and accepts that its part of the journey of discovery going on in the industry.
Having been a fund manager since 2003 and overseen the Royal London Sustainable World Trust since launch in 2009, Fox has seen a number of different market environments not least the challenging conditions of 2020.
“In some respects, the fund is the purest play you can get of what’s gone right and what’s gone wrong in the world,” said Fox.
Performance of fund vs sector YTD
Source: FE Analytics
Year-to-date, the fund has made a total return of 16.23 per cent compared with a loss of 1.99 per cent for the IA Mixed Investment 40-85% Shares sector.
“You’ve got no exposure to the huge capital destruction that’s occurred in industries like oil & gas, and even leisure, as well as physical and carbon-intensive assets which are clearly on the wrong side of what’s going on in the world at the moment,” said Fox.
“We don’t have any of those and that’s the function of the sustainable approach. It’s a manifestation of the idea that you’re not going to maximise your risk-return unless you integrate sustainability.”
One of the key trends of the pandemic has been the accelerated rate of digitisation, benefiting companies like Microsoft and Adobe, two core holdings in the fund.
Microsoft, in particular, has seen the enhancement of its three main business segments – business processes, cloud and personal computing – during the Covid-19 crisis as people were told stay home.
“It also has powerful carbon reduction targets, and the first to commit to offsetting every ton of carbon they’ve produced since 1976,” said Fox. “Cloud computing done right is also massively environmentally friendly as a lot of these huge server farms hook up to renewable energy.”
It shows that one of the biggest companies in the world can facilitate large scale sustainability through increased digitisation.
“Whereas the physical world is quite environmentally problematic, the digital world is far less so and this is very interesting from a sustainability angle,” he concluded.
Performance of fund vs sector under Fox
Source: FE Analytics
Since launch, the Royal London Sustainable World Trust has returned 302.48 per cent compared with a 96.46 per cent gain for the sector. It has an ongoing charges figure (OCF) of 0.77 per cent.