ESG is mainstream, fraught with confusion and there is very little to show for it despite record take up. Time to step up for real change… is it going to be the sustainability theme?
I was an early adopter of ESG(Environment, Social and Governance). To be honest it was easier to complete and ESG analysis than jumping into 5 years of accounts when preparing the model. Also, to prepare the ESG analysis of a company goes someway into determining exactly what the company truly does and its real opportunities and definitely its risks. Just the ESG analysis alone can determining what needs to occur to rerate the stock prior to completing the determination of the intrinsic value.
What concerns me now is that ESG has become so mainstream that it seems that no one has NOT taken account of ESG factors. All the super funds and their investment managers seem to take into account ESG and there is a growing movement for financial advisors to take up ESG thematic in their business processes. So, if ESG is so mainstream surely we would be seeing some meaningful change.
Would you expect still to see, insider trading, the destruction of Aboriginal heritage, remediation across insurance, financial planners and the use of casinos to launder monies?
ETFs are showing no signs of slowing down there advance on Active Management
Like anything it pays to look under the hood and just a little digging, shows that ESG is taking off at the same time that ETF’s are taking off. Exchange-traded funds built on ESG themes have attracted record inflows this year, as the world grapples with the pandemic, devastating weather and racial unrest.
Inflows to ESG ETFs have surged to $USD22 billion so far in 2020, already about three times the 2019 total, according to data compiled by Bloomberg. Three BlackRock products dominate the ESG fund market and make up the majority of total assets. But under the hood BlackRock Inc.’s ETF’s includes stakes in Exxon Mobil Corp. and Chevron Corp., and biggest holdings are in tech companies under investigation for monopoly abuse. So how do stocks that are far from carbon neutral or socially clean end up in an ESG fund? Its seems that BlackRock works with MSCI Inc. to set its funds’ inclusion and exclusion rules rather than complete the full picture themselves.
Salim Ramji, global head of iShares at BlackRock, said: “The performance of ETFs through the latest market stress test illuminated the trust that investors place in ETFs to manage risk, seek price discovery and hedge portfolios and risk – and the trends we have historically seen in the US market, are now playing out in Europe as we reach critical mass.”
Really your managing the risk yet MSCI sets the funds inclusions?
I have two major concerns. One that there appears to be no measurement of any impact that is beneficial to ESG and two the analysis appears to simply be one of add or subtract from the benchmark and no consideration as to whether the stock is under or over-valued. As Paul Moore loves to say “80% of the benchmark is fairly valued” and “20% under or over its true value”. ETF’s simply invest with a consideration of ESG and it seems that ETFs give the ESG responsibility to include or exclude to a data provider being in this case MSCI. Time to close the hood as all I can see in Green Washing. It should be made clear to investors that the ESG in ETFs is just a tilt and in truth the ESG movement should be further up the analysis chain than simple screens. Complicating things somewhat is the fact the Securities and Exchange Commission doesn’t regulate how the ESG label is applied.
It’s time that the UNPRI step up and audit the ESG movement as it seems they regard the growing number of signatories as success. What success? What measures (what IMPACT) are they having?
There are two fundies that I respect, primarily because they ignore the benchmark and focus on identifying opportunities oblivious to their weights. When I drafted up my first ESG – Responsible Investment Policy for Paul at PM Capital, he responded that the policy represents what the analysts should be doing anyway, why strip it out and put it in a policy? He had a good point. Why was there stock analyst’s not preparing a view on Environment, Social and Governance if we are picking stocks for 3-5 years? The other is Simon at Allan Gray who stated that when things become mainstream is the time to be wary and look to reduce exposure. My two take a ways, were that a stock analysts should always complete the components of ESG into a complete analysis of a stock and beware when everyone is claiming they complete the ESG analysis.
I suggest that you will find that very few complete ESG analysis and even less rely upon it to vote at AGMs and determine a valuation.
Defining ethics and impact
Defining Ethical Investing is challenging, as everyone’s ethics are different. We only look at the difficulty that financial advisors and having in establishing clear ethical boundaries to see the difficulties let alone the regulator is rudderless at present.
Be aware
There are a lot of terms used when discussing Responsible Investing. The differences can subtly but there are differences between ESG funds, ESG ETFS, Socially Responsible funds, and more so with Impact and Sustainable funds. Retail investors need to be more cognisant that grey areas mean you need to dig a bit deeper before committing money for profit and ethical considerations.
“Investment options and assets in sustainable funds in the Australian retail marketplace continue to grow, with promising signs of performance during the volatility caused by the pandemic,” says Kennaway in a report, Sustainable Investing Landscape for Australian Fund Investors, co-authored with Morningstar analyst Peter Gee
The funds themselves will likely end up investing in very different things and you need to do some research to make sure you are comfortable with the companies that end up in the portfolio.
Recent Trends
The most recent trend is Sustainable Investing but again, you can define this in various ways. A number of managers are using the UN’s Sustainable Development Goals (SDGs) as a framework for determining whether a company can be considered to be ‘sustainable’. I expect the SDGs will become more widely adopted in the future by other investors.
Tarren Summers
Tarren began his career at Mercantile Mutual in Client Service's before moving to London and working in transition management for Merrill Lynch. Recent roles include working at PM Capital Ltd (Paul Moore) for over eight years as the Portfolio Analyst with responsibility for ESG analysis and investment analytics. Tarren worked with Investors Mutual (Anton Tagliaferro) where he was the Senior Analyst responsible for research data and communication. He joined Paradice Investment Management (David Paradice) as the Head of Institutional Client Services.