This opinion piece challenging the win-win sales pitch of ESG investing has generated a huge amount of comment. https://t.co/bbpTwxMm5J
— Josephine Cumbo (@JosephineCumbo) October 25, 2020
I am a 58 year old investor whose pension pot is invested mainly in equities which are managed with ESG factors. I have invested this way for a few years now and am beginning to see the fund I use providing me with a better return than my previous strategy, which did not employ management to environmental , social and governance factors – to the same degree.
I took the view when I found I could use the L&G Future World fund, that though all funds would naturally move to ESG, because the underlying assets would be required to be managed that way, accelerating that process would pay dividends to me and make my money matter. This approach is criticised by Robert Armstrong, the author of the article Jo refers to – on the basis that you can’t have your cake and eat it.
The article makes a few assumptions which for me are just plain wrong. Chief among them is that retirement savers suffer from short time horizons.
There are no investment returns at all on a planet left uninhabitable by climate change. But that is not the time horizon individual investors operate over (they might have just 20 years between acquiring significant assets to invest and retiring). And it is far beyond any corporation’s planning horizon.
There are two reasons to challenge this statement, firstly because it is much more widely held than many liberals (like me) would care to admit and secondly because it is plain wrong.
The saver’s perspective
Looking at the subject from the pension saver’s perspective, people do not stop investing when they reach retirement. Unless they choose to put their savings under a mattress , they keep investing whether the decision is taken by them (DC) or by fiduciaries (DB and CDC) most people’s pension savings rolls over into retirement in broadly the same assets as prior. Even annuities are now backed by investments into social enterprise (see my blogs on the capacity of annuity books to invest in patient capital).
2. The corporate perspective
People’s time horizons are long and so are companies, at least when long term investors in them demand it. The second fallacy of Armstrong’s statement is that the management of the companies to whom we lend money or invest in equity can behave as they please. They can’t; the management of a listed company is subject to the scrutiny and to a degree the control of shareholders- this is what is called stewardship and it is not some tree-hugging concept that doesn’t exist in real life. It is a reality of running a modern company. Corporate time horizons are having to merge with their investors whatever the past tells us about short-termism.
3. The global perspective
The third perspective trumps the first and second and is absolutely conclusive. “There are no investment returns on a planet uninhabitable”… to suppose that a generation like mine can consider that those living in our shoes at the back end of this century will have to pay the price of our behavior is shocking. Can we really have become so carnal in our pursuance of immediate gratification that we can accept that our actions are condemning another generation to an “uninhabitable planet“?
I can think of no sentient parallel in nature, Within the DNA of the species that live on this planet is the capacity to mutate. The purpose of our mutation is to perpetuate the evolution of the species as it faces up to future challenges. Of course there are failures and they are known as “dinosaurs” because we know that dinosaurs couldn’t adapt! Are we really choosing to be dinosaurs?
Secondly let’s challenge Armstrong’s market hypothesis
Armstrong argues that
it is the goal of the ESG movement to push investors away from “wicked” portfolios — making their prices cheap, and setting them up to outperform “virtuous” portfolios over time!
This allows him to suggest that there will come a time when cheap “wicked” stocks become valuable enough to reinvest in, meaning that we revert to mean – mean being a return to the ways of the past 200 years.
But this is not the reason for ESG. ESG is about changing the way that wicked stocks behave so that they become virtuous stocks and in so doing, avert the impending issues surrounding inhabitability.
There is nothing that says that the market is any different from the components of the market. If the weight of investment is so behind ESG that fundamental change happens, arbitrage against change will be swept away. There is no fundamental reason for financial markets not to be aligned with general good, indeed the converse is likely to be true.
ESG is more than an investment approach
My final beef with Armstrong is that he considers ESG investing a style , rather than a fundamental principle. In this he is currently right, we still hear trustees talking of the need to include an ESG factored fund into a range of investable options. But that is becoming rarer and what is becoming common is the shift of defaults to be managed along ESG lines.
Armstrong compares his adoption of “value investing” in the first decade of the millennium, to the current adoption of ESG factors. This is an introspective and myopic view of investment that sees the purpose of investment purely as a means to provide short-term in-flows of money into funds through marketing gimmicks.
But the demand for ESG in funds is coming, not from “experts” but from the general public and it is based less on investment theory than on observation of what is going on – both on the planet and in the boardroom.
We are now faced with the task of living in a world where Coronavirus is likely to inhibit economic growth, setting about making fundamental change to the way we manage our financial affairs does not seem so daunting , now that we have found ourselves adapting to a new way or work and living.
Within this new paradigm of circumstances, the arguments of Armstrong hark back to the old normal, to which few of us either expect or want to return. The world is moving on and so should Robert Armstrong.