ESG is coming, but more top down than bottom up…..

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Jan 02, 2020

Although there are still some deniers, most people agree climate change is the biggest threat facing mankind.

Institutional investment has been concerned with the content of portfolios for some time, but retail has been slow to react. My instinct is that real change will be top down, rather than bottom up.

Advisers are rightly concerned about what rules around environmental, social and governance may be introduced by the regulator, and are keen to see a form of ESG screen in place. The problem is there is so much subjectivity on the subject.

Investment usually comes down to fear and greed. The excellent FT journalist, Gillian Tett, wrote a piece on the fear asset managers have of a write-down on carbon stocks due to analysts’ estimates of future revenue collapse decimating their funds. Norway’s $1.1trn sovereign fund will divest companies solely dedicated to oil and gas exploration and production in a bid to shield itself from a long-term fall in oil prices.

I have long believed that investors will ultimately favour sustainable investment, but there are two problems. We need to invest in coal and oil. Currently, there is no method of making steel without coal; experts think a solution may be 20 years off. The need for oil will carry on for decades, albeit reducing. Moreover, oil companies have the resources, competences and need to develop alternative solutions.

If institutions and private investors either refuse or are unable, due to legislation or regulation, to invest in such stocks, someone else will. Prices will become highly attractive and major private investors, private equity, family offices and hedge funds will be happy to reap the rewards.

Many ethical investors make decisions based more on emotion than on sensible judgement. Just because some pharmaceutical companies behave badly, it doesn’t mean there shouldn’t be investment in pharmaceuticals.

One of the most encouraging developments is the increasing awareness of stewardship among major asset managers – including the leaders in the passive sector, BlackRock and Vanguard. All major companies are aware that they will need to ensure bad behaviour stops.

None of this makes it easy for advisers in the short term. There are two certainties:

  1. Advisers must establish what their clients’ wishes are in terms of what they are happy to invest in. They will be storing up problems if they don’t.
  2. Then, they must have suitable solutions. The gatekeepers – fund managers, research/data providers and major wealth managers – cannot escape creating funds and model portfolios that meet these requirements.

Let’s have a grown-up conversation before doing something silly.

Clive Waller is managing director of CWC Research

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