ESG Investing – Everything’s So Good?

ESG Investing – Everything’s So Good?

Oct 26, 2022

I have, for a few months now, been reading some negative articles about ESG investing, which, for the uninitiated, means Environmental, Social and Governance. Some people might just simply label these as “green” or “ethical” investments; however, the goal is more elaborate.

The aim is to ensure that companies inside any fund have been filtered, removing any that lack total transparency and compliance in these three areas. This is a fine goal, and one that I fully support, arguing “what is the alternative other than to ignore the needs of the planet and everyone living on it?”

Every year, I go to London to attend a special international investment conference, where I get to see the best and brightest investment minds, flown in from all over the world, brought together in one room. I am just one of hundreds of attendees who are made to feel very privileged, to drink at the font of such incredible global investment knowledge.

I have learnt, many years ago, not to fully trust such experts, not because I believe them incompetent or even dishonest.

I have listened to a presentation, for an hour, on how good Europe is and I should put all my client’s money there; so, says the Business Development Director for Europe. But then there is another presentation on Asia, and it sounds brilliant; much better than Europe, at least says the Chief Investment Director of Asia. We believe in a global, diverse low-cost portfolio, as no one can see around corners.

The point I am making is the big problem, which is that everyone is making a pitch for their own corner. It is vital to examine, very carefully, who is saying what and why (indeed, that includes me!).

I completely admit, it would be odd for fund managers to criticize what they do, which is why I could not call such self-promotion dishonest.

To take the side of the negative for a moment, ESG is, indeed, a new buzzword and we have certainly seen investment managers “jumping on the bandwagon,” even renaming funds as ESG, with no compliance (otherwise known as “greenwashing”). There are trillions invested in ESG funds, so you can see the motivation of financial companies to get on board.

The issue I have then, is not the idea of telling people to be careful when dipping one’s toe into this brave and conscientious world, however, I do disagree with articles telling people to keep away from it entirely, as something that is somehow dubious and potentially dangerous. This is especially the case when I see that these articles are commonly written by those with significant links to industry or industrial backgrounds (I am back to those “pitching their corner”).

When I first met my wife (a French / Belgian dual national), she told me that she “loved British people.” I laughingly jested, “really, all of them? Even the ones in prison for the evilest of deeds?” The point I am trying to make is that most people are good, but there will always be some bad ones.

We do not become hermits because there are bad people in the world, and we should never stop trying to do what is right; to make companies accountable for their actions, to ensure that we, as investors, are not financing evil, such as child slavery, funding wars, offering dangerous working conditions for employees, and killing our planet for future generations.

Regulation of ESG is rapidly developing on a global scale and it is very aggressively weeding out companies and funds / fund managers who think that they can cheat, being rightfully subjected to much public shame.

ESG, however, is more to me than merely being green. We could focus on the G, if this appeals to those with a need for profit that is greater than the need to keep one’s moral compass steady.

Would you like to invest in badly governed companies?

I would even argue that there is only the G, not because it is the only thing that matters, but because considering the social needs of your employees and clients is good governance. Considering the environmental impact of your business is good governance.

These ESG filters, applied properly, give the advisor / investor so much more information about the companies into which they are investing, since it requires them to be completely transparent about how they govern themselves. This extra information is extremely useful!

As an adviser, I like to have as much information as possible about where money is going and how it is being used. It helps me better assess risk and potential performance. It also ensures that we avoid the “bad eggs”, whose shares plummet after being, very publicly, named and shamed for poor business practices.

As a company, Kentingtons only recommends funds and portfolios that are ESG compliant. Our job is to make sure that we are clear that funds are authentic ESG compliant investments (now with increasing regulation, this is getting easier), whilst ensuring returns are good. We have not found good returns to be a problem; indeed, we have seen outperformance. Why would this be a surprise when we know our whole portfolio is invested in transparent well governed companies?

We have yet to meet any resistance to ESG. However, for those who do not take exception to poor business practices, ill treatment of the world we live in and the people in it, I hope that such non ESG investment options become increasingly more challenging to find.

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 Disclaimer: The information in the above article concerning taxation is based upon our understanding of the taxation laws and practises in France at the time of writing. These taxation rules are subject to change and as such, Kentingtons cannot be held responsible for any inaccuracies that may occur. The information in this article does not constitute personal advice. Individuals should seek personalised advice in relation to their own situation.

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