Investment Advisers will soon be mandated to take Environmental, Social and Governance factors into account when recommending investments. I will tell you now, the rules will prove to be as expensive to comply with, as they will be unfit for purpose. The new rules will fall well short of what the legislation is trying to achieve. Currently although there are many ESG measures out there, we have found no ESG benchmarks that we can trust and that are not open to abuse.
When a measure becomes a target, it ceases to be a good measure.
Charles Goodhart
Have you bought an ESG friendly portfolio or fund already? Whoever sold it to you probably has never heard of Goodhart’s Law. They haven’t considered that the measures they apply have been gamed.
E is for Environmental
I have been reading “Apocalypse Never” for sometime now, written by Michael Shellenberger. Michael is a Time Magazine “Hero of the Environment,” Green Book Award winner, and the founder and president of Environmental Progress. The book is not an easy or enjoyable read hence it seems to be taking me forever to get through, but I think it is important enough to see through to the end. I just need to find some additional time.
Are we going to Hell in a handcart? He thinks not, undoubtedly the way we live now must change, but ever increasing technological breakthroughs will prove to be mankind’s saviour. He’s unhappy that the green agenda has been overrun with organisations such as Extinction Rebellion, which he believes simply alienates more people than it recruits to the cause. We will not escape from this destruction of the planet by division and civil unrest, but by everyone playing their own small part. The rebels are just virtue signalling – I’m greener than you!
So a good “environmental fund” would avoid all miners, especially coal miners and certainly all fossil fuel extractors, shippers, refiners and vendors. (There went a huge part of the FTSE 100). It should embrace local food production over international produce due to pollution from vehicles. As aircraft are responsible for wholesale CO2 emissions, companies that promote international leisure travel should be avoided such as airlines, travel companies and obviously cruise lines too.
There are the environmental issues associated with the build up of single use plastics in the oceans. This is coupled with the increasing worry about microfibres found in every continent of the planet, including Antarctica, released from synthetic clothing. All this PPE today will become landfill tomorrow. The plastic content is astonishing.
Then there is livestock farming that destroys the natural environment to produce beef. Cows belching produce more methane, a greenhouse gas, than any other source on the planet. I always thought the gas came from the other end of the cow.
It probably wouldn’t be too difficult to construct an investment portfolio incorporating these environmental restrictions, and to some extent we have gone some way towards this. So living, spending and investing to help the planet is perhaps something we can all do.
But I have come across several “Green” funds that find BP acceptable to give a high rating to, because it invests £billions in the environment. The fact it has been forced to spend £billions to put right the damage it has caused seems lost on them.
S is for Social
But ESG ratings don’t stop with trying to protect the planet. What about the people on the planet? Capitalism isn’t perfect, but it is certainly the best of the available options. Business that builds profits for shareholders by exploiting its workforce does leave a nasty taste in the mouth once exposed.
Companies that allow bad and dangerous working conditions, wages below the minimum limit, forced labour, slavery and employing children, all mainly third world problems. But Social criteria in these funds include ensuring there are sufficient females employed in higher management roles or at board level. Employers who discriminate on the basis of race, colour, caste, sexual orientation or disability are obviously penalised. Then there is the additional he, she, they conversations to be had which seem to be more important to some fund managers than children working long days for less than £1 making training shoes in Vietnam.
Should we avoid the investment opportunities presented to us because senior management shows prejudice? Would you invest with me if I decided to wear skirts and high heels to work twice a week? You may laugh, but there is a partner at a well known US bank in the UK who does precisely that. That business would score very highly on a LGBT diversity measurement, perhaps the points gained here cancel out some of the issues of low pay and poor conditions for staff in their Indian call centre.
G is for Governance
Governance is everything for us investors. We will always be minority shareholders. Individually we are powerless, so we need to invest in companies that adhere to the highest standards. Standards that stand up for the little guy and are enforced by democratically elected governments in countries where there is an independent judiciary and freedom of speech. Without those 3 pillars in place, how can we be sure we will receive the dividends due to us? How can we ever hope to have our capital returned if we decided to sell those shares? Now you have had the meaning of governance pointed out to you, would you invest in any Chinese company in the future? What about a Russian, Turkish, Saudi, Iranian, Venezuelan or any other company helping an oppressive regime to prosper? The performance can be tempting, but it’s worthless if our capital invested is never returned to us. India has much higher governance standards than many countries, but there remain huge levels of corruption. Governance is everything.
So are there any Chinese owned companies in ESG rated funds? Yes! How? Governance as a measure has again been hijacked. It’s easier to measure where fund managers can exercise their joint shareholder might to ensure profits are fairly distributed to us shareholders, rather than to just the ‘fat-cats’ with their six and seven figure remuneration packages. Voting against the directors remuneration package. Big deal! He/she/they could be worth it in some cases. Activist hedge funds forcing break-ups of companies to improve short-term value. Others placing representatives on the board of companies and increasing diversity in the boardroom. Now maybe none of those are bad moves and perhaps we benefit, but all it amounts to usually is tinkering at the edges for power and short term profit. Funds should not invest there if they want to really change the fortunes of oppressed peoples.
Greenwashing
In the past offensive areas were covered with cheap white paint to hide the truth. Whitewashing. Obviously that was before B&Q sold fence paint in every shade of the rainbow. Today fund management remains the same as it was, just covered with a layer of green paint credentials now, so the punters can be charged more for pretty much the same balance of assets they held before, just because the fund now claims to be ESG. The punters can be happy to believe they are changing the world in exchange for the additional fund management charge.
We do invest with a conscience don’t we?
I’ve never been tempted to invest in tobacco stocks for myself nor my clients. Loosing your father at age 15 to lung cancer would make anyone draw a red line there. But Imperial Brands, British American Tobacco and Philip Morris International do pay high dividends. They all have many investors and I do have clients who smoke. Those shares feature in most funds and certainly all index funds. Neil Woodford built his reputation from owning them – great dividends . Over 1 billion people on this planet are addicted to fags, that’s a nice business case.
Now I do like the occasional drink (more often than not through lockdown if I’m honest). So I don’t draw the line at investing in companies associated with alcohol. On a large scale we have a couple of £million invested in Diageo (Guinness and Johnnie Walker), whilst on a smaller scale so far on the Transact platform we are invested in LVMH (Louis Vuitton Moët Hennessy) not so much for the handbags, more the champagne, cognac and the Glenmorangie). Personally I have some Chapel Down shares too. Wonderful fizz and dry whites, plus sold at a 25% discount to shareholders.
I would consider British Aerospace or Rolls Royce, even though they are involved in producing armaments. I believe state security is important. I would also consider investing in Cannabis, not as anyone who has ever used the stuff like Michael Gove, but because there is plenty evidence promoting its use for the alleviation of chronic pain.
Stand for something or fall for anything
So Fags, booze, weapons, oil extraction, miners, gambling, child labour, racism, sexism, organised crime, political repression, animal exploitation, plastics & pollution. A stand has to be taken somewhere on all of these issues whether we admit it or not. Individually we can make a small difference, collectively our savings can help to make a change.
Here’s a few questions to stir your conscience.
Can we invest in any Chinese companies where there is an ongoing forced labour and genocide of the Uighur minority population by the communist regime?
What about the oil companies that extract the raw materials necessary for the plastics that are filling our oceans?
Coal is such a dirty fuel. Can we help fund companies that extract future supplies that add to the CO2 build up in the atmosphere and hence contribute to climate change?
What about the companies that sell the meat from areas of the planet that have been de-forested like the burger places and the supermarkets?
There are no correct answers to these questions unless you understand all of the facts and perhaps take an extreme view on some of the issues. Personally I have no problem with clients who draw the line on any of these issues, as I have done with the cigarette companies. If you want to buy shares in Imperial Tobacco, British Aerospace, Rio Tinto, Alibaba, Royal Dutch Shell and McDonalds, why should I impose my values on you and stop you? Hell, I could even create a new model portfolio called “Just Nasties”. Who knows, you could make £millions.
Peer Pressure
We all have biases and are subject to subtle subliminal forces. I do have a conscience, the website has gone green. The company vehicles are electric, except for my evil diesel Defender. Even the office walls have been painted in subtle Farrow & Ball shades of green. We are considering solar panels and battery storage to compliment the recycling and the low voltage LED lighting. Perhaps it’s all just greenwashing at 15 Chorley New Road.
But my greenness doesn’t stop at the visuals. I sold Shell and Boohoo across the portfolios not because I was a environmentalist and a flag bearer for a fairer society, but because I figured many investors would not like to be invested in those shares either, so the price would fall and indeed it has. I sold because I didn’t want us to lose money. We own a supplier of re-cycled cardboard called D.S.Smith, a converter of coal-powered power stations to biomass called Drax, a manufacturer of wind turbines called Orsted and a hydrogen fuel cell manufacturer called Ceres Power. More telling is what we don’t own which is an awfully long list. We don’t just buy the whole index – polluters, exploitists, racists, sexists and all.
Could we do better?
Of course we could. We have discretionary permissions and can invest anywhere. Tell us what you want, where your personal red lines are and we can taylor a portfolio of shares perfectly to fit just you. However as your portfolio would be highly personalised, your management fee would need to be much higher too to cover our additional research. Perhaps we could bunch groups of clients together if their red lines were aligned and run additional portfolios at no additional cost.
In conclusion
There is no such thing as a true ESG Fund. They are all just a compromise. A complete fudge for profit. All the companies who do the measurements today are paid for by the companies being measured. Go figure. There could be E funds, S funds and G funds, as there is no “one size fits all” solution. Anyone who currently buys an ESG fund is turning a blind eye to a whole lot of elephants in the room. The buyers of these funds are just virtue signalling, feeling smug as they have done the right thing. Meanwhile the elephants keep dying.
As I said at the start of this blog, soon we will need to prove we have taken ESG factors into account. It’s going to prove hard to comply with unless we have anybody who invests in our anti- ESG Nasties portfolio. Are there any takers now please to make my life easier? If one person invests there I can prove we took ESG factors into account for everyone else.