On a long weekend in Bath earlier this year I slipped into a side street to allow through the small band of environmental campaigners rounding the Abbey behind a bright green banner.
It was the first time I’d heard of Extinction Rebellion, the activist group who have just concluded ten days of peaceful protests across London, urging the government to “tell the truth” about the scale of the global climate crisis.
I met them again in the City in larger numbers last week, and had to find a brand new route to work as a result. But, of course, my disrupted morning was the point. And bleary-eyed tutting aside, most would agree the latest co-ordinated effort has brought the issue of human-induced climate change back into the conversation. We will have to wait and see if the group achieves its goal of setting up a Citizens’ Assembly to oversee a reduction in the UK’s carbon emissions to net zero by 2025.
It’s not a surprise that the mass protests have come along at the same time that investors are seeing a strong resurgence in promoting good environmental, social and governance (ESG) standards among the companies we all invest in. While most of us would stop short of gluing ourselves to a government building, we are certainly becoming more concerned with where our invested money is going and what it’s being used for.
Firm ESG standards are important for some on ethical grounds but that presents a spectrum - what is morally right to me might not be to you. For investors, it’s arguably more fruitful to look at ESG-focused investing from a more pragmatic point of view. In this instance, it’s not about the core focus of the business but the obstacles bad practice can end up presenting along the way.
Increased regulatory crack-downs, fines and public backlash can punish companies wedded to profiting from unsustainable and harmful revenue streams. When this hits the bottom line, investors ultimately pay with a falling share price.
So, while many will point to the opportunity cost of missing out on big gains in the likes of tobacco and alcohol stocks over the years, ironically what investors think they would be giving up to use ESG-first strategies is often what fund managers are trying to achieve - sustainability.
To these managers the best way to make sure that’s a strong probability is to look at responsible companies in sectors that either don’t do damage to the world around us, or do a lot of good. For them, it’s more likely that they will survive and prosper than companies that risk running out of resources or face further regulation. The extra leg-work ESG analyst teams conduct to clarify just how sustainable a business is, and how liable it would be to fines etc. if its operations went wrong, is designed to prevent shareholders being exposed to unnecessary risk. While each individual strategy will make judgement calls on which business sectors to include and exclude, many investors in the space seeking reliability of cashflow with a long-term view simply see a fund’s overall social aims as a happy bonus.
The health of UK plc relies on the same governance standards being observed across the board - there can be no excuse for poor business practices and, like one unvaccinated individual among the crowd, they can bring down supporting companies and services through a single firm’s negligence.
Extinction Rebellion might not have corporate profits front of mind but that doesn’t mean investors can’t. David Osfield, co-manager of the EdenTree Amity International Fund says: “There’s been an enormous amount of academic and commercial investment bank-led research about ESG strategies and they’ve found a positive approach that has led to superior risk-adjusted returns over the long term.”
Read more about ESG investing and funds in the sector here
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.