Register Log-in Investor Type

News

QD view – warm fuzzy feelings?

QD view – warm fuzzy feelings?

Alphabet soup time

ESG (environmental, social and governance) comes up a lot in the investment world currently. There are good reasons for that. The UK government said last year that it wants to make climate-related disclosures mandatory, in line with recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). The rules will apply to premium-listed companies first and then all other UK listed companies shortly thereafter. The Financial Reporting Council (FRC) is also recommending that UK public interest entities begin to report against Sustainability Accounting Standards Board (SASB) disclosures. Perhaps the most significant influence, however, is that more and more investment managers are signing up to the UN’s Principles for Responsible Investment (UN PRI).

  • Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
  • Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
  • Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
  • Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
  • Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
  • Principle 6: We will each report on our activities and progress towards implementing the Principles.

With over 3,000 signatories and more than $100 trillion of assets under management, the PRI is now very influential.

The implication of Principle 1 is that most funds will be managed with an investment approach that incorporates ESG analysis. The big question is: to what extent will managers just pay lip service to these principles, adopting a box-ticking approach?

I suspect that codifying what ESG means and how it must be reported might actually encourage a box-ticking mentality. It may still be down to investors to keep managers on their toes.

Peak ESG?

Right now, with net zero emissions targets being set and a change of regime in the US, tackling climate change and addressing sustainability is much higher up the agenda. Investment trust boards have been seizing opportunities to make their funds greener. Just in the past few weeks we have seen:

  • Dunedin Income & Growth propose a new investment objective: “To achieve growth of income and capital from a portfolio invested mainly in companies listed or quoted in the United Kingdom that meet the company’s sustainable and responsible investing criteria as set by the board.”
  • Acorn Income Fund announce that it will appoint BMO as its investment manager with a new objective of: “Long term capital growth and an attractive and growing dividend yield by investing principally in a portfolio of publicly listed global companies that make a positive impact on society and the environment”.
  • The proposed launch of a new investment trust – Liontrust ESG Trust would invest in a diversified portfolio of sustainable companies that Liontrust believes will capitalise on and help drive the key structural growth trends that will shape the sustainable global economy of the future; will provide or produce sustainable products and services; and have a progressive approach to the management of environmental, social and governance issues.

We already have a sizeable collection of investment companies that focus on ESG issues but don’t make it front and centre in their investment proposition. Good examples from our client base include the two Montanaro trusts – UK Smaller and European Smaller – and Alliance Trust, the former home of the team that will be managing the Liontrust fund. Another trust that adopted a sustainable approach to investing some years ago was Pacific Assets.

What is driving the current green rush?

The rush to embrace ESG and sustainable investing is, I think, not just a response to pressure coming from above. I believe that many managers are driven by altruism rather than greed, but undoubtedly they also see a commercial logic to promoting their ESG and sustainability credentials to an investing public that likes the idea that the money they are investing for future generations will also help make their world a better place. The implication is that this trend has further to go. However, being ‘green’, ‘sustainable’ or ‘ESG-aware’ may soon be commonplace rather than a distinguishing factor.

Leave a Reply

Your email address will not be published. Required fields are marked *

Please review our cookie, privacy & data protection and terms and conditions policies and, if you accept, please select your place of residence and whether you are a private or professional investor.

You live in…

You are a…