Why ESG now? | Quilter Cheviot

4 minute read

ESG concerns go mainstream

A colleague who has just returned from maternity leave commented that when she left the office, ESG was not mentioned that much, whereas now it seems to be on the tip of everyone’s tongue. Is this just ‘mentionitis’ as made famous in Bridget Jones’ Diary? It seems not. There are colliding forces which have catapulted ESG to fame; or at least to a wider audience.

The colliding forces are unlikely bedfellows: Sir David Attenborough, Extinction Rebellion and regulation. Taking them in turn; the Blue Planet II series has changed people’s attitudes towards plastic having seen the impact it has on the environment and its inhabitants. Overnight plastic straws became notorious and companies rushed to find alternatives (not always with a positive effect). Extinction Rebellion has changed the climate change narrative in giving it an urgency which perhaps was lost previously. Finally (and yes this is the most prosaic) regulation now has ESG in its cross hairs.

The regulatory changes cover a vast gamut including an update to the UK Stewardship Code. Signatories now have to show how they integrate ESG factors and climate change into their investment process. From 2020 onwards, advisers and investment managers will be forced to consider the ESG/sustainability preferences of clients when performing suitability assessments.

Taking practical steps

So how do we go about integrating ESG preferences into suitability? The regulator is not entirely clear at the moment but a good first step is to understand what we mean by ESG. While there is a lot of confusion around the term, an ESG investor simply considers environmental, social and governances issues when evaluating an investment opportunity.

There has been a lot of chat in the media about ‘greenwashing’, where funds (in particular) are criticised for not being ‘good’. To some extent ‘greenwashing’ is subjective – it’s when there is a disconnect between what the fund or investment manager says is happening and the reality. Again it all goes back to understanding why you bought the fund.

The recent Climate Accountability Institute report named the 20 firms behind a third of all carbon emissions from 1965 to 2017. Unsurprisingly within the list there are a number of oil companies: should you avoid investing in these knowing the impact they have? For an ethical or sustainable investor who is focused on reducing their carbon footprint, the answer might be yes.

For an investor who is thinking about ESG integration, it will be more nuanced and will focus on whether they believe that the company is doing something about climate change – in a positive way. There is a strong argument that engagement is better than divestment for companies who are willing to change. The concern with divestment is that the only remaining investors have no interest in change and so bad behaviours remain unchallenged.

ESG is often a line-by-line, case-by-case issue

Disclosure plays a key role in ‘greenwashing’ as well. How clear is the manager’s reporting on voting and engagement? If the fund aims to link holdings to certain sustainability themes, are these clearly demonstrated? Reporting plays an important role in this and is often under-estimated.

There is no perfect company and as a result, no perfect fund. If you consider what the average investor was concerned about three years ago it probably would not have included the plastic life-cycle and climate change. This is an evolving space with wealth managers and financial advisers playing catch up to some extent.

For some time, the emphasis on stewardship and by extension ESG has been focused on the institutional investor; we believe (and the evidence supports this) this is changing. However, the wealth and advice industries have some challenges compared to the institutional investor, primarily related to scale. That is scale of holdings, resources and influence.

Ultimately you want the journey to be one of integrity. Going back to the greenwashing point, there will be a temptation for box ticking to take place given the wave of ESG demand. You can’t move from doing nothing in this space to suddenly being all-singing, all-dancing; it takes time.

There has to be a consideration about what has the most impact – we have limited our voting and engagement to the UK as that is where the majority of our holdings with voting rights are domiciled and where we are able to get access to boards and management. We will consider expanding the voting universe outside the UK. However, engagement goes side by side with voting, and we will not be able to gain the same access to company boards as we have within the UK.

We would suggest advisers start due diligence on investment managers to find out:

what they offer in terms of ESG and ethical mandates
their own understanding and processes for ESG and ethical mandates
what resources they have at their disposal
what level of transparency they offer in terms of the holdings from either an ESG or an ethical perspective
whether the offering meets your clients’ requirements

If you have any questions on our own ESG or ethical approach, you can contact your local Regional Development Manager.

Author

Gemma Woodward

Executive Director & Head of Responsible Investment

I lead the responsible investment team at Quilter Cheviot working to ensure that we act as stewards of our clients’ assets in order to protect and enhance their long-term returns. I am a member of the Investment Oversight Committee within Quilter Cheviot and I am a member of a number of industry groups focused on responsible and sustainable investment.

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