Earlier this week I listened to an interesting webinar on sustainable investment given by Mike Fox of Royal London Asset Management (RLAM). It is a term you may have heard or something similar called ESG – environment, social and governance. Nowadays investment companies talk about embedding sustainability or ESG into their investment decisions and similarly businesses are keen to promote their socially responsible corporate culture and practices. For example Diageo, a global drinks manufacturer state the three priorities underpinning their sustainability and responsibility strategy are promoting positive drinking, building thriving communities and reducing their environmental impact. All very well and good perhaps, but what is the difference between ethical investment and sustainable investment or ESG?
To answer this question we need to consider the range of responsible investment strategies and look at the evolution of ESG. For many years most fund managers and many people considered investment to be amoral. Investments were bought purely for their ability to make money. There was no ethical or socially responsible considerations taken into account when selecting what companies or funds to invest in. It is a do nothing approach with respect to sustainability, with everything being a potential investment. At the other end of the scale is philanthropy, with wealthy people giving away money for social good. Here in contrast to an amoral view of investment, social good is the only thing that matters and a financial return is not expected.
In between these two outliers we have ethical investment and sustainable investment, though they are not the same. Although ethical investment came to the market in the mid-1980s, it remained for a long time a niche product with relatively low uptake. It focuses on avoiding the bad using negative screens. Traditional ethical funds are sometimes described as being “dark green.” According to Fox it is dour and focuses on UK and single assets. In contrast sustainable investment which evolved from ethical investment is modern and inclusive with a focus on doing good, rather than avoiding the bad. It is not country or asset class restricted. Fox also asserted that it has led to enhanced returns. Sustainable investment or ESG has now gone mainstream in the investment and corporate world at least. It is all the rage, whilst ethical investment rarely gets a mention.
Fox argues sustainable investment is predicated on the belief that capital can be deployed as a force for good. It is about investing in products and services that are cleaner and healthier and make a positive contribution to society. It is also about good corporate behaviour (ESG). Crucially Fox recognises the importance of making money i.e. generating returns ahead of the cost of capital. In simple terms for each £1 you invest you expect to get more than £1 back. That is what any investor expects. He contrasts this with what is called “impact” investing where below market returns are accepted for a greater social impact. RLAM are not in this arena. They are pragmatists and clearly want to make money for their investors and it is true their range of sustainable funds has been successful delivering strong returns. You won’t find anyone wearing sandals at their offices.
I can see the argument for a more inclusive sustainable investment strategy. Fox cited two examples in his presentation. The first was Diageo which according to Fox is an ESG leader with impeccable credentials, for example on good water management. He takes the view that alcohol itself is socially neutral in nature. It is not inherently bad and is good if used responsibly. In contrast tobacco he observed is socially damaging and harmful and shouldn’t be included in sustainable funds.
The second company was Google which although has had reported ethical issues such as privacy and alleged tax avoidance it has democratised knowledge, made it freely available with a big positive impact globally. Sustainable investment appears to be about making a net positive contribution and for Fox Google and Diageo fit the bill.
So what is my assessment? It is clear that sustainable investment has widened the scope and potentially the appeal of traditional ethical investing. It is undoubtedly increased the investment universe for fund managers in this space, with the potential for greater returns. Fox however did not present any evidence to support his claim that investment returns have been enhanced by a sustainable investment style. Whilst I am aware of some modern sustainable funds have cracking track records I am also aware of dark green ethical funds with terrific performance. So for me the jury’s out. My biggest concern however is that Fox who is clearly a cheerleader for sustainable investment does not appear to see a role for traditional ethical investment and in my experience this won’t do. A good number of my clients are still keen to avoid investment in the so called sin stocks such as tobacco or arms production. They want to invest with a clear conscience and that requires negative screening. For one client all companies involved in animal testing have to be avoided at all costs even if the testing is for human medicine.
The other issue for me, and this is just my personal opinion, sustainable investment or ESG appears to be a classic fad. It has come out of nowhere to the point it seems to be the most important issue in investment, the must have corporate policy to go alongside those on privacy, modern slavery, inclusiveness and diversity. Every business is keen to stress how seriously they take corporate responsibility and the environment. Whilst I am not saying these things are unimportant I can’t help thinking there is a certain amount of virtue signalling going on here. No business wants to be seen lacking in keeping pace with the accepted norms of social responsibility. Moreover I don’t think the development of sustainable investment was driven by investor demand. It appears to something invented by those who want to make ethical investment less restrictive and therefore more mainstream. I may be cynical but it appears in part to be a bit of good marketing, designed to attract new investors, people who like the idea their investment is a force for social good, even if they are not too concerned about the lack of negative screens. Remember a company that is rejected by an ethical fund may be included in a sustainable fund if it is net positive i.e. its social good outweighs the bad. Finally I am not a fan of the term sustainable. It seems to me that if something is slapped with the label sustainable or progressive, it is indisputably good even before it is subject to critical analysis. That can’t be a good thing after all sustainable itself is not a quality; it is assessment of durability. It can be bad. My quirky sense of humour takes my mind to dictators and despots who pass laws that keep them in power for life. I know it is hyperbole but that is a sustainable outcome!
Despite the rise of ethical and sustainable investment most of my clients do not require it. They make no moral choices on what they are happy to invest in. A minority do. If you are in this camp you will need to decide whether there are strict red lines you don’t want to cross, in which case traditional ethical investment with negative screens is required. If however you are keen for your money to have a general positive social and environmental impact and you are happy to include investment in companies who may have ethical issues but where the good outweighs the bad, then sustainable investment is for you.
The content of this blog is based on my own understanding of ethical and sustainable investment. It reflects my personal views and is intended as general investment information only. Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances.