Making people’s lives better
At present, the asset management industry is making a concerted effort to embrace principles of environmentally and socially beneficial investing (ESG), or at least appearing to. In September alone I attended seven virtual conferences focused on this topic.
Over the last decade, and in no small part due to the awareness efforts made by broadcaster Sir David Attenborough, individuals have a greater concern for their plastic consumption, carbon footprint and the impact of their investing habits.
This phenomenon has reverberated through industries and sectors and is stirring a philosophical debate on the very purpose of capitalism.
Economic schools of thought, such as modern monetary theory (MMT) have emerged to challenge existing economic frameworks. It revolves around the notion that not all deficits are equal and, if caused by investment in infrastructure, research and education, they can nurture economic growth with added societal benefits.
In 2019, New Zealand took action and ceased measuring success in terms of GDP and instead adopted “gross national wellbeing”, emphasising the populations happiness, as their economic focus.
The COVID-19 pandemic has accelerated these developments. The European Green Deal, the latest strategy to stimulate economic growth, targets spending on renewable technologies and decarbonising the energy and transport sectors. The aim is to become climate neutral by 2050.
In this country, Boris Johnson recently announced plans for the UK to invest in green infrastructure and become to wind power what Saudi Arabia is to oil!
It is not just governments and academia that are taking action. It was widely reported in June that only 6% of the British public desire a return to the pre-pandemic status quo. Instead, many would like to see a more equal and climate conscious society emerge.
Shades of green
This movement has spawned an abundance of new terminology and acronyms. “Ethical investing” and “socially responsible investing” (SRI) appear interchangeable in financial literature.
The customary nod to ESG can be found in most investment funds’ marketing materials. Two common approaches taken are negative and positive screening.
Negative screening finds suitable holdings by filtering out investments based on certain criteria, such as if more than 5% of the company’s revenue is derived from fossil fuels. Positive screening on the other hand filters to include companies improving their ESG approach.
Among the issues with these two methods, negative screening does not necessarily mean the chosen investments will be beneficial toward the environment or society. Equally, positive screening could justify the investment of an oil & gas or tobacco company based on their improving operations.
However, a key concept repeatedly emerged from the recent conferences – no longer is it enough to quantify an ESG score with an arbitrary number or rating. What matters are qualitative measures, the tangible impact our investments have on people and the environment – to borrow from the ancient Greek proverb, “a society grows great when old men plant trees whose shade they know they shall never sit in.”; Investing not just for short-term gain but for long-term stewardship.
The notion that these values come at the expense of investment returns is flawed. In fact, absolute return funds are now starting to look at unfavourable ESG scores to find ill-governed companies and generate ideas for their ‘short book’, where they sell the shares to profit from the decline in stock prices.
There are compound effects to socially beneficial investing. Abraham Maslow’s work on the human hierarchy of needs shows that the motivations to care for the planet succeed those for food, shelter and security.
Companies that in some way alleviate people from poverty and accommodate these needs help free up their capacity to focus on higher ambitions such as activism. This creates a virtuous cycle where they might then have the means to help others.
Investment in research into new technologies is a higher risk activity within this area but it also has the ability to generate a higher impact. For example, funding the construction of wind turbines may be environmentally friendly, but developing new battery technology to store that energy more efficiently would lessen our dependency on fossil fuels further.
Making people’s lives better
This is Equilibrium’s purpose. It applies not only to our clients and our team but to the community as a whole. We therefore have a responsibility to understand and monitor how our investment activities impact people’s lives. To be the old men planting trees (literally in some cases).
A cornerstone in this process was when Equilibrium recently became a signatory to the United Nations Principles for Responsible Investment (PRI).
An important element of our ESG process is monitoring the UNPRI ratings of the underlying fund management groups we invest with, as well as engaging with those groups to ensure appropriate standards are upheld. In the future (by the end of 2021), we will only invest with firms who are signatories of the PRI.
We will also monitor our portfolios’ carbon emissions as the first point in understanding our own impact and contribution to climate change. This will allow us to provide clients with their portfolio’s carbon footprint and allows us to set measurable targets.
We believe this process enables us and our clients to have a greater understanding of the non-financial aspects of the portfolios but also how we can use this information in our decision-making process and make everyone’s lives better.