The beauty behind ESG subjectivity

By Matt Lowe, Investment Manager, Mountstone Partners

True or False

The world’s second largest ESG fund invests in oil companies?

The answer believe it or not, is true.

I must stress, the fund in question makes this very clear and has an easily defined screening philosophy on its home page. Amongst other industries that are screened out, this fund removes companies who attribute 5% or more of their total revenue to oil sands extraction. However, after a deeper look into the portfolio some companies crop up who may not be the likeliest of constituents in a fund deemed ESG: Exxon Mobil, Chevron and Marathon Petroleum. These companies extract oil, just not from oil sands.

My question to you is this: Do you really know what companies are in the ethical funds you buy?

With a burgeoning investment universe for ethical investors, we as intermediaries need to ensure that the companies and funds we invest in do not have any holdings that go against our clients wishes or investment strategy boundaries.

I feel it is important to state, the fund mentioned above is not guilty of greenwashing. They make it very clear that they seek a low tracking error to the underlying index and focus on those companies within it that have favourable ESG practices. This is a perfectly viable product for many who seek a passive investment with some form of ESG overlay.

However this fund is only one of hundreds of investment funds across the world that are currently championing their ESG credentials.

With such a sudden wave of new money into this part of the industry I do feel we need to raise awareness to the different approaches within the ethical universe so as to assist investors who may feel a bit perplexed with the sheer number of ethical investing approaches.

Over the last 18 months we have seen a significant inflow of capital to investments that are part of the Sustainable universe. Using figures from Morningstar, at the end of last year the global sustainable universe had hit $1.7tn in assets under management. $350bn of this was new money in 2020 alone. Simply incredible! Alongside this, over the last 18 months we have seen increasing numbers of ‘standard’ funds highlighting their own ESG screening processes. Couple this with the bombardment of terms like Impact, Sustainable, Best in Class and Positive, it is no wonder investors can become a bit flustered! Intermediaries themselves may well be inadvertently greenwashing the credentials of their own portfolios by seeing the terms Sustainable or ESG and believing the underlying portfolio is free of certain sin stocks and industries.

As opinions towards our growing corner of the market change and increasing numbers of investors allocate to these investments it is our duty to ensure each individual product clearly states what the investment screening process is.

Whilst the above terms may fall victim to being labelled jargon, they are anything but.

We need to do more to highlight that these terms are not comparable as part of one big ESG umbrella, but that they are very specific investment strategies worthy of consideration in their own right.

Fossil fuels tend to fall at the first hurdle when negative screening is involved and as we all know, Ethical investing is incredibly subjective. I may put more emphasis on a sustainable supply chain versus my colleague who feels board diversity is more important for the long-term growth of a company. The beauty of the ethical space is when we collaborate on a number of clear, well defined issues we can create a positive impact on the company, the industry and society. This difference of opinion in the office is no different to the fund management industry. Each fund will view ESG/ethical investing through a different lens. We need to respect and understand these boundaries before investing.

As ESG enjoys its time in the limelight, now is the time to let the world know that there is no one size fits all for ethical investing.

It is an opportunity to align your personal values with a manager who can put your money to work in a way that you deem acceptable and can genuinely help to make the world a better place.  

There certainly is a lot of jargon out there. No question, and we can do better to reduce this. We must also highlight to colleagues, to advisers and to clients that an Impact fund can be very different to an ESG fund and as such the holdings will differ. As part of our fiduciary duty we must ensure we follow our clients wishes and remove those sectors they deem negative from portfolios and make sure our own portfolios are aligned with the ethical investment strategy set forth at inception.

As this week marks the two-year anniversary of the suspension of the Woodford Equity Income fund, we must all remind ourselves of our duty to clients to invest diligently and to ensure the assets we do invest in are transparent and aligned with the set values and beliefs of our clients.