Investing responsibly means looking beyond the hype.
Last week ended on a sombre note ecologically. As the UN released a report showing how little progress we’ve made since Paris – leaving open the possibility of a disorderly transition – predictions of the imminent collapse of the Gulf Stream and male fertility, both exacerbated by man-made pollution, did little to lighten the mood.
If only one believed in the redeeming power of philanthro-capitalism, one could rejoice in Chris Hohn’s good fortune and his increasing ability to lobby, invest and donate for a sustainable future. Personally, when I need reassurance we might just be travelling in the right direction, if not necessarily at the right speed, I turn to Assaad Razzouk, whose weekly ‘good climate news’ tweet never fails to cheer.
There was good news this week, although some of it was a little fuzzy around the edges and thus hard to get over-excited about. In the week of the Powering Past Coal Alliance summit, first Citi, then Goldman Sachs set zero-emissions targets. Citi were soon chided for being too vague in their commitments, similarly M&G were taken to task for leaving firms too much wriggle room in the engagement process.
Cynicism is dangerous but understandable. In a week where there was plenty of evidence of asset managers successfully attracting money into ESG-branded funds, there was also some justification for thinking certain vehicles were having a marginal real-world impact.
Morgan Stanley’s Institute for Sustainable Investing showed that sustainable US equity and bond funds outperformed in 2020, justifying growing demand from institutional and individual investors. Meanwhile, the Investment Association revealed that UK savers put almost £1 billion a month on average into responsible investment funds in 2020.
But how responsible are these investments? Having mapped out a more ESG-aware corporate governance code, Japan’s Financial Services Agency launched a greenwashing review after an ESG fund managed by Morgan Stanley and sold by Mizuho failed disclosure requirements, then was found to have high exposures to Big Tech stocks. This is despite mounting concerns about the sector’s opaque governance and ownership structures, creative tax planning and employee-unfriendly HR practices.
There was also plenty of noise about a lack of renewable energy solutions present in Parnassus Core Equity, the United States’ “largest ESG fund”. Despite holding no fossil fuel stocks among its holdings of large – and transitioning – US firms, Parnassus appeared to underplay the S of ESG with its large Big Tech exposure.
The fund’s approach to engagement with investee companies and voting in upcoming AGMs went unreported. But any asset owners not sure about the difference between greenwash and ESG integration could perhaps apply the Baines test.
Alternatively, both retail and institutional investors could eschew equities for bonds, after the green gilt universe was broadened via a retail savings bond in the UK Budget, to accompany Britain’s first green sovereign bond. Although we must wait until June to find out use of proceeds.
With central banks under scrutiny for the brown assets amassed under QE, the Budget also tweaked Bank of England’s remit to include a duty to support the government’s net-zero carbon ambitions. So that’s at least one green gilt customer lined up.