By: Mona Shah
There has been a good deal of ‘greenwashing’ of late – repackaging existing investments as environmentally friendly. But don’t expect to see many investments in Stonehage Fleming portfolios with the words ‘green’, ‘ethical’ or ‘sustainable’ in their names. Indeed few that do, stand up to close scrutiny when you run the Environmental, Social and Governance (ESG) metrics. Neither do they always perform well.
Our approach is to look beneath the surface to find investments providing genuine sustainability. Take the Majedie UK Equity Fund for instance. It doesn’t have the word responsible in its title. Neither is the name Majedie necessarily synonymous with ESG investing. But if you look closely at their process, sustainability is embedded from beginning to end.
When Majedie meets company management teams, sustainability is at the top of the agenda. The same is true when they meet the executive level below. If you look at their company voting over the last five years, you find they have voted on every single proxy that has come their way, often against management, particularly when proposals were not in the interests of all stakeholders.
The UN launched their Sustainable Development Goals in September 2015 - a blueprint for policymakers to achieve a better and more sustainable future for all. Today we are operating in an environment where sustainability is on the agenda across the board and some companies are putting it at the top. Taking a closer look can reveal a lot, sometimes in unexpected places.
Luxury retailer Burberry is one of the largest buyers of cashmere. They have engaged in a five-year community programme in Afghanistan to provide training and tools to the herders of cashmere goats to enhance their livelihoods and help lift them out of poverty.
For its part, Chinese online retail platform Alibaba, has entered into a strategic partnership with the World Food Programme to develop a digital ‘World Hunger Map’ via cloud computing to monitor global hunger and enhance operational efficiency. This will make a huge difference in many ways but particularly in getting aid to those who need it most in the event of a natural disaster.
Elsewhere, Siemens has evolved its business model to offset the 4.5m tonnes of carbon dioxide it emits every year. One of the global leaders in wind turbine production, Siemens has pioneered technology to transfer renewable energy to the grid. They have also developed a technology to take waste from landfill sites and convert it into energy for industrial use in their plants and factories.
Adopting a policy of mass exclusions – screening out stocks like tobacco - is a quick but unsophisticated way of greenwashing. However, many ‘consensus’ stocks that at one point had claim on ESG credentials, like Facebook, Tesla, or Volkswagen – have fallen hard from grace. Facebook is facing a governance crisis caused by the Cambridge Analytica debacle, Tesla faces ongoing investigation by the US Securities and Exchange Commission and VW is still recovering from its emissions scandal.
While ESG models are good at identifying risks, they cannot accurately predict the possibility of the risk occurring, nor the magnitude of the damage. Hence both ESG and mainstream investors suffered as these crises unfolded. We therefore seek out managers who look beyond the quantitative metrics and analyse risk from a qualitative perspective too.
When it comes to asset allocation – balancing risk and reward by apportioning funds across a mix of asset classes - we construct portfolios from a holistic perspective. ESG investing is just as relevant for fixed income as it is for equities. We observe it is not unusual for ESG multi-asset portfolios to include a fixed income allocation populated by US treasuries. We will look to minimise controversy scores and carbon emissions in our equity allocation, asking investors to consider whether investing in US treasuries - lending money to the US government who did not sign up to the Paris Agreement - would conflict with the equity proportion. Our goals is to ensure equity and fixed income complement not conflict with each other.
Impact investing emerges as an interesting route to bringing sustainable investment to client portfolios, not only as a diversifier of returns but also because of the positive measurable social and environmental outcomes it delivers. Not to mention the feel-good factor.
ESG investing is not new. It is not a fad; the emergence of robust data sets to rank companies using ESG criteria has opened the door to it becoming mainstream. For example, it is data mining, powered by technology that means that we now have reliable information on companies’ carbon emissions and female board participation both in developed and emerging markets. The power of the internet means this information is disseminated around the world, influencing how and what we consume, how we get from A to B and now, finally, we can use it to be more socially responsible in how we invest.
This article has been prepared for information only. The opinions and views expressed on any third party are for information purposes only, and are subject to change without notice. It is not intended as promotional material, an offer to sell nor a solicitation to buy investments or services. We do not intend for this information to constitute advice and it should not be relied on as such to enter into a transaction or for any investment decision.
Whilst every effort is made to ensure that the information provided is accurate and up to date, some of the information may be rendered inaccurate in the future due to any changes.
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