Climate Assets monthly update: Clarity ahead?
Date: 11 August 2022
Chinese philosopher Hong Zicheng (1572-1620) said "When water isn't rippled it is naturally still. When a mirror isn't clouded, it is clear of itself. So, the mind is not to be cleared; get rid of what muddles it, and its clarity will spontaneously appear."
The language around sustainable investment is cloudy. Even when attending the Sustainable Investment Festival, in June, as a delegate and speaker, I heard both excellent and some very confused usage of the terms ESG and sustainable investment. That's why we so urgently need the UK's forthcoming taxonomies to help ensure we all speak the same language, otherwise we're lost in the fog. With the language muddle resolved, clarity will appear, this will be very constructive for investors.
No such thing as an "ESG company"
We define sustainable by WHAT a company does and think of ESG integration in terms of looking at HOW a company does what it does. There is no such thing as an "ESG company" instead we would assess whether "a particular company has good enough management of its environmental, social and governance risks". This assessment depends on good quality underlying data, sadly another industry problem, but also an area of steady improvement. We do the best we can by getting under the bonnet of 'ratings' to interrogate the granular data and make our own assessments.
For those of you who are avid watchers of TED talks, you may well have come across Simon Sinek whose talk "How great leaders inspire action" is number three in the most popular talks of all time.
He adds a third magic circle to the equation: WHY
The gold standard sustainable investments, the ones that will change society over the decades ahead, start with the fairy dust from their leadership providing the purpose - WHY the company does what it does. The good news is that for leaders with ecological awareness sustainable goals are easy to get impassioned about and inspire purpose.
Let's apply WHAT/HOW/WHY thinking to a company most readers know well - Facebook/Meta. We're often asked whether Facebook qualifies as a sustainable investment? Let's take a closer look.
Facebook's WHAT is social media, the HOW, achieved through its platforms funded by advertising revenues targeted by algorithms and WHY, is 'to bring the world closer together'. Its rebrand as Meta makes the WHAT also virtual reality, to "move fast together, build awesome things, focus on long term impact, live in the future and to be open."
However interesting, social media and building a virtual reality metaverse is not sufficiently relevant to our concern for our planet, and the problems around resource scarcity, climate change and population growth. In our assessment this doesn't make the grade as a sustainable investment eligible for the Climate Assets Fund.
This autumn we expect, from the FCA, the Sustainable Disclosure Requirements and, from the government, a green taxonomy for the UK. Muddle removed, we hope Zicheng was right, and we then have calm clear waters and smooth sailing for investors.
Author
Caroline Langley
Investment DirectorI have over 16 years of experience in the private client industry and 14 of those are with Quilter Cheviot where I have worked since 2006. I manage private client portfolios (taxable accounts, ISAs and JISAs, trusts, SIPPs, small charities and offshore bonds) working with clients directly or alongside advisers. I am also Deputy Fund Manager for the award-winning Climate Assets Balanced Fund and the Climate Assets Growth Fund.
Climate Assets Funds
The Climate Asset Funds invests in companies that make a positive contribution to the world, with a strong underpinning of ethical values.