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Holly's Blog: A kick in the financial nuts?

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We published new research on ESG investing this week, reporting back to the industry on what advisers and customers make of this. ES-wot? If you don’t know what I’m on about, you’re not alone. I always think ESG sounds like a variant of salmonella. In fact it stands for "environmental, social and governance" – three key factors which investment managers think help them understand the long-term prospects for a business.

98% of people don’t know what ESG is and most fund managers – not known for telling clear, succinct stories – are tripping themselves up trying to explain it. One of the biggest challenges is to dissociate it from the single association with ethical funds which have been running for years, typically adopting a ‘no nasties’ approach, banning fags, weapons, porn and other ‘bad’ things. These ethical funds polarise opinion and an increasingly popular sentiment is turning against those who lecture from on high, telling us what we shouldn’t do with a pious wag of a finger.

ESG is not universally popular – one reason is because many people don't see past the E. In a week in which Greta Thunberg’s stolen dreams lit up online discussion forums across the world, people clearly feel strongly and differently on environmental issues. For any of you curling your lips about ESG, here are three examples of why I think it’s not hippy-dippie-Greenham-Common*-peace-and-love-sanctimonious-whatevs- it’s just common bloody sense!

 

“I’ll have an E please, Bob*”

E – no new diesel or petrol cars can be sold after 2040. So when you consider the automotive sector, you need to know what they’re doing about electric cars or you are literally investing in a dying business.

S - consider the ramifications of those mining firms who disregard the health and safety of their workers when disaster follows. Adidas and Microsoft’s supply chains. How does Boohoo make dresses for £10? Why does Cineworld have zero-hour contracts?

G - think back to the collapse of Carillion. Enron. Volkswagen’s share price after the emissions scandal. Uber. Or the impact of having a CEO or a Chairman who is an uncontrollable power-hungry maniac accountable to no-one. Someone who runs an airline and awards themselves a potential €99 million bonus?

 

The thing I really like about ESG is that it is an AND/AND not an EITHER/OR. Even those who think that climate change is a leftie fantasy can see the case for strong governance. And those who don’t want their pension savings to be destructive can find a way to make their money talk.

 

Fags – toxic for many reasons

Tobacco firms made pots of money in the past so there’s still a fear in some circles that avoiding the fags will hit returns. That notwithstanding, 21% of fund investors told us that even if there were a 2% hit on returns, they did not want their money to be invested in tobacco. Full stop. 29% would take a 1% hit. So nearly one-third of us would say no to baccy even if we took a small hit. Would you? Email me. Let me know what you think.

But actually this question is broader than the morals of investing in something which kills. Back to the future-facing prospects for businesses, and here is why NEST, one of the main pension funds in the UK, gave up cigarettes this year. “Key factors such as stricter worldwide regulation against tobacco products, increasingly aggressive legal action by governments against the tobacco industry and falling global smoking rates has led Nest to conclude tobacco is a poor investment for its more than 8 million members”. This was a hard-nosed investment decision.

And this is what is so interesting about ESG. In a world where Gregg’s stellar results this year were largely put down to the vegan sausage roll, consumer sentiment is changing. Buying patterns are changing. And policy is changing. Investment managers have a real opportunity to pool our money to fund and support a better world, to turn up at board meetings and kick those particular nasty megalomaniacs in the financial nuts, and to use our money to fund future-facing businesses – and also make us some money on the way. If they can do it (and that’s a topic for another day), I think that is called a win-win. No?

Have a great weekend

Holly

Practical stuff

If you want to find out more, you currently have 4 main choices that I can see.

  • Pick an ethical fund and take out the nasties. Hargreaves has the Kames Ethical fund in its Wealth 50. Interactive Investor has Rathbone Ethical Bond in its ii Super 60 and AJ Bell hold Kames Ethical Cautious Managed in its favourite funds.

  • Pick a theme such as climate change, gender diversity on boards etc and invest that way. Legal and General has lots of funds in its Future World Fund range which offer this themed approach.

  • Pick a sustainable or an impact fund and invest in future-facing businesses. This article on Morningstar lists the top-performing ESG funds and Fidelity has a nice page on ESG funds here – if you believe in the wisdom of crowds, their most bought ESG fund is Liontrust Sustainable Future Absolute Growth 2.

  • Or finally, for the simplest "all-in one options", look at the ready-made choices on robo advisers such as Nutmeg or Wealthify or check out the Multi-Asset Impact Growth fund if you use Barclays’ platform.

*With apologies to young people for the liberal sprinkling of analogies from the 80s. Enjoy your lack of wrinkles and ask an oldie to translate.

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