Wellian Weekly 21.09.2020

ESG Opportunities

2020 for all its very many negatives, has given us a glimpse of how the environment can show signs of recovery when human activities are curtailed. Memorable footage of fish swimming in Venice’s turquoise canals symbolised nature’s ability to bounce back, taking advantage of lockdown to reclaim space usually overrun with people. As governments attempt to reignite economic activity, we have seen foot on the floor acceleration in the shape of vast fiscal stimulus, but with short term restrictions to manage rising covid risks akin to hitting the breaks. With the devastating loss of economic activity this year, has come a small positive in the form of lower CO2 emissions. 

To combat climate change, CO2 emissions need to fall much further and this needs to be delivered without simply halting economic activity. A fundamental shift is required to facilitate the transition that is required in the coming decades and the experience of 2020 serves to give us a better appreciation of the scale of the effort required to decarbonise without also devastating the economy. As the normalisation process continues, or we continue to adapt to the new normal, we expect to see an acceleration in global trends including those relating to sustainability, which are further supported by the UN’s Sustainable Development Goals (SDGs).

The recent proliferation of investment strategies with a ‘sustainable’ badge has been welcome, although it has not been driven directly by client demand. We think our experience has been typical in that we have seen an uptick in client interest, but many investment houses have been readying themselves in anticipation of demand rather than responding directly to clamouring investors.

Sustainable portfolios are looking very different from those of the early noughties. Whilst we do still see more traditional strategies with approaches that focus on filtering out the undesirable, whether that centres around conservative values (excluding tobacco, gambling, alcohol etc) or environmental awareness (excluding nuclear power, animal testing etc) today we see that better data and the SDGs have given managers a framework to offer far more flexibility and choice. Portfolios can be designed to deliver against specific SDGs, such as gender equality or decarbonisation, which aside from suiting investor sensibilities can also tap into some of the most significant investment themes. 

It is a cliché, but to identify the best opportunities, it’s essential to look beyond the fund name. Much to the exasperation of long-time ESG advocates, ‘greenwashing’ is rife and investment processes are reverse engineered to fit with a sustainable ethos. In presentations ‘the token ESG slide’ is ubiquitous. Even if a business has a strong reputation for incorporating ESG analysis, it would be inaccurate to assume all managers are passionate supporters for integrating ESG analysis. Less well-known are the investment strategies that do fulfil ESG criteria but do not openly badge themselves as sustainable or ethical, possibly for commercial reasons. These strategies highlight the benefit of looking at the steps taken by all managers to consider non-financial information, irrespective of their mandate. 

As the incorporation of ESG analysis becomes increasingly mainstream, the distinction between ESG and non ESG is no longer black and white, but points on a spectrum. ESG investing will just be investing. Portfolios will reflect this trend and an increasingly sustainable world, although we expect to be able to take advantage and invest on the right side of change, ensuring we have exposure to the most powerful themes in an evolving environment. 


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