Environmentally-conscious investors should stop obsessing about divestment, according to Investec Asset Management’s Deirdre Cooper, and focus instead on backing companies whose products are having a tangible impact on climate change.
The popularity of divestment – which involves selling out of companies that are unethical or morally ambiguous – has been increasing in line with environmental awareness, as a growing number of people look for actions they can take to address the threat of global warming.
According to environmental pressure group 350.org, $11trn of institutional money has been divested from companies involved in the extraction, production and supply of coal, oil & gas since its Fossil Free campaign started in 2012.
However, Cooper, who runs the Investec Global Environment fund, pointed out that while there are ethical reasons why people don’t want to invest in companies that aren’t aligned with their personal beliefs, there is no evidence divestment will have any sort of impact on the rate of climate change.
“[But] what we do know, is that there is an enormous amount of investment that has to happen on this subject,” she said.
“And as the investment community, that’s kind of what we’re supposed to be doing.
“So instead of splitting hairs over who owns how many shares of which oil company, let’s find a way to mobilise personal investor savings – but more importantly, large asset owners and pension funds – to actually invest and fund those companies, products and services that are needed in order to make this transition.”
Cooper said part of the problem of why divestment has trumped environmental-impact investing as the go-to theme for ethically conscious investors is the lack of scrutiny about the results.
For example, she compared the sustainability reports used by many negative-screening funds with the financial reports they are obliged to deliver. The manager said that if you ran them through a language processing tool, the sustainability report would result in a word cloud full of positive adjectives, such as ‘great’, ‘impactful’, and ‘fantastic’, while the financial report would contain a mixture of positive and negative adjectives, with figures required to back up any positive claims. She said sustainability reports need to be produced in the same way.
“What we do is publish the carbon data on every company in the portfolio, in terms of emissions and how much was avoided.
“So what our investors are able to do is look at this and say, ‘okay, just like with a financial attribution, you have 25 stocks, and with 18 of them, the carbon intensity is reducing and the carbon avoided is increasing’.
“‘For five of them, the carbon intensity has increased a lot and your carbon avoidance hasn’t grown, so please explain to me why you think those names belong in this environmental portfolio?’
“And then we’ll need to write and say 'we’ve been disappointed with the performance of X, Y, and Z because they didn’t grow their carbon avoided and their footprint got worse, but actually, we engaged with management and we think they have a plan in place to improve that. And therefore we’re prepared to stick with those investments'.
“Or, ‘those numbers have moved in the wrong direction, and therefore we exited the stock’. But it gives the investors the ability to question us on our sustainability attributes. And I think today, most investors don’t really have that ability.”
Cooper said that just as there are numerous 'sustainable' funds that don’t have a tangible positive impact on the environment, there are numerous companies that are overstating their environmental and ethical credentials in a bid to jump on the sustainability bandwagon.
In a recent article on FE Trustnet, Liontrust Macro Equity Income’s Stephen Bailey said he made a complete U-turn on oil stocks. While he originally sold out of the sector on concerns about the viability of fossil fuels as a long-term investment, he bought back in, saying the likes of Shell are moving away from their traditional business models and decarbonisation could usher in a new era of profitability.
However, Cooper is not convinced.
“There is an example of a Danish oil & gas company called Orsted which has transitioned,” she continued.
“It no longer has any oil & gas and has the world’s largest share of offshore windfarms by a country mile, almost a quarter of the market.
“You look at most of the others and the PR well outweighs the reality. They argue they are spending 40 per cent of capex on renewables, but they include things like gas. I want to be generous and say Shell are spending 10 per cent on renewables. But you know, put it this way, it’s a 90/10 times split.
“That doesn’t mean there isn’t value in Shell. This is not a judgement on the share price. But from an energy transition perspective, to consider the oil majors as a great way to play this transition, all you need to know is they’re spending 90 per cent of their money on old energy, and 10 per cent on new energy, and their PR tells you they are a renewable energy company.”
There is still scepticism that funds that focus specifically on ethical or environmental concerns do so at the expense of returns.
However, recent data from Interactive Investor shows that five out of six ethical funds produced better returns than their in-house counterparts over the past three years to 31 August 2019, while four out of five funds did so over five years and two out of three did so in the past decade.
Cooper is not surprised by the outperformance of such funds, pointing out there is evidence that companies with strong ESG (environmental, social & governance) scores tend to outperform over the long term.
However, she said that more important than this is the long-term theme of decarbonisation, which an increasing number of growth managers – many of which have no ethical or sustainability credentials to speak of – are trying to tap into.
“This transition has already started,” she continued. “So the companies that are exposed to this transition are seeing that growth.
“But the pace of that growth will absolutely not be linear, it will take place over 20 or 30 years.
“We need to remember this isn’t a smartphone cycle. When you cover financial trends, you’re inclined to think about much shorter investment opportunities, you know, ‘there’s a new product launch and this is going to be really great for five years’.
“This is arguably the single biggest investment that the world has ever had to make in peace time. So the numbers dwarf any other possible investment opportunity.”
Data from FE Analytics shows the Investec Global Environment fund has made 14.52 per cent since launch in February this year compared with 11.08 per cent from the MSCI World index.
Performance of fund vs sector and index since launch
Source: FE Analytics
It is $71m in size and has ongoing charges of 1 per cent.