There is a great wave of enthusiasm amongst the investment community for responsible investments, the three factors underpinning it, Environmental, Social and Governance came into almost every discussion at this week ‘s Public and Private Pensions Summit.
But with such waves of enthusiasm, there must be eddies of caution. ESG is essential if we are to encourage good behaviour in the organisations into which we invest, but we must not allow the keys to ESG to be handed to an elite group of specialists who can hold us to ransom to unlock its secrets. Nor can we allow fake green to paint over the real thing.
The price of ESG
I am not suggesting that this is happening, but the chances are that profiteering from ESG will happen and that as I write the more unscrupulous fund managers are dreaming up ways to compensate for margin erosion by the “beta brigade” by fixing the price of ESG at the wrong level.
If you don’t believe that ESG has a price, look at the pricing differential between LGIM’s Futureworld Mutli Assset Fund and the LGIM Multi Asset Fund. The latter is considerably cheaper and this is explained by it not having the tilts and screens of the former. The difference in price is the current price of ESG. I am prepared to pay that price for now, I invest in the FutureWorld versions of L&G’s funds because
- I believe that they will bring me better performance
- I see them carrying less risk
- I like the idea of my money being invested responsibly.
But the price I am paying for Future World is twice what I could be paying for the global equity equivalent. I am hoping that the price differential will fall over time as the upfront R and D costs in setting up the fund are diluted and the ongoing management charge converges with those of non ESG funds. Indeed I’d like to think that in five years time that the idea of a non-ESG fund won’t exist. After all – who wants to invest irresponsibly.
The impact of the price differential
One impact of differential pricing is that it makes it very hard for workplace pension providers to make the ESG fund the default.
Put simply, no matter how much the IGC reports clamour for green defaults, so long as a price differential remains, those running the fund platforms which drive long-term profit for workplace pensions will go for the cheapest version.
They have only three choices
- Stick with the cheap and not so cheerful default
- Upgrade to the ESG version and absorb the margin hit
- Upgrade to the ESG version and pass on the extra cost as a price hike.
Of the three options (1) is the obvious winner for now. It is not until the clamour for ESG defaults becomes deafening that (2) and (3) come into play. Exactly the same issues occur for trustees as for IGCs, no matter how they might want ESG in the default, until there is a compelling business case for it, it ain’t going to happen.
What we can do
Personally I have little sympathy for fund managers who complain about margin erosion. I work in a WeWork that looks into Schroders and I see the corporate gym, the workers canteen and the pleasant balconies on which fund managers can soak up the sun. It does not look like that fund manager is suffering a lot of margin pressure to me.
I suspect that a lot of the costs of ESG can be absorbed out of the fat margins identified in the FCA’s Asset Management review and the CMA’s subsequent market study. After all, most people would assume that when they gave their money to someone to invest, they would get a degree of stewardship that as the bare minimum , would be called “responsible”.
It’s a bit like buying a car and discovering that the brakes are extras. ESG is not the equivalent of leather seats (though you’d expect leather seats for the price we pay for most active management).
What we can do is complain, complain to IGCs , to Trustees , to the FCA and tPR and write to Government (the DWP and Treasury) and ask why ESG is not standard.
We don’t have to pay more for something we should have always have been getting and if we are getting more than we expected, then we should politely ask fund managers whether they might take a little less.
The more fund managers I hear explaining how much they are now doing to keep our funds responsibly invested, the more I question what they have been doing the rest of my days. I don’t think that the concepts of climate change, sustainability and good governance began in Paris in 2015. I seem to remember that most of the ideas behind ESG were being discussed when I was at primary school in the early 1970s. Wasn’t the world about to run out of fuel by now?
What is happening today is that there is a crisis created by our complacency over the intervening years and that is leading to everyone wanting to do ESG now. And so , instead of getting on with it and fixing things which were broke, we see fund managers passing on the bill to the customers.
I am not sure that we should be picking up this bill. I think it is the bill for repairing a research system that should have been in place 20 years ago.
So instead of ramping up prices so we can have our funds invested responsibly, perhaps we should be asking for a fund management rebate for not having our funds invested responsibly over the past forty years.
A little radical? Well maybe- but let’s not accept price hikes as a gimme. ESG profiteering is going to be a big theme of the value for money debate and this is the first salvo on my blog of a theme you will hear a lot more of!