How many column inches have been written about ESG in the last couple of years? Probably more than money that has been invested in the asset, but considering absolutely loads of money has been invested, it does make me think there is still a lot of education and clarity needed. I’ve read lots about why we need a “kitemark” or standardisation. I’ve read lots about “this is the time for active management”. I’ve read lots on “greenwashing”. I’ve equally read lots on why we don’t need standardisation; on why the UN SDGs are the guiding light, and equally why they leave lots of holes from an investment perspective. I’ve read lots. I’ve actually written lots too which probably doesn’t help clear the waters. ESG is a subject matter that evokes a lot of emotion; a subject matter that – presently – doesn’t have an answer. Of course there is the Paris agreement, but there is no standard way to get there. It reminds me of one of my favourite sayings relating to investing – “the answer is 7 – what’s the question?”
When it comes to research and analysis, there is positive screens, negative screens, transition screens and so on. A week or so back I read that BHP was going to remove it’s UK listing and return to Australia and this got me thinking. By default, BHP is a company that is unlikely to score well on ESG criteria. Removing the stock from the FTSE index will actually improve the ESG standing of the index, but the company itself continues to do what it does. By default, the ESG standing of the Australian market – where it will have its only listing – will get worse. Overall, the status quo remains.
Will this make the UK index more appealing to an ESG investor and Australia a less appealing market?
Many commentators and investors believe that by not providing capital a company will suffer – the cost of capital will rise and the attractiveness of the company becomes less appealing. This might be so, but many investors will invest for different reasons, and this is a rather blunt tool. It also seems fairly obvious that most column inches written focus on the equity side of ESG, whereas debt doesn’t seem to get the same attention.
From an equity perspective, owning a share gives you (in the main) a vote – a seat at the table to voice displeasure with the board. You can vote against decisions. But, to make a company change, you need to have skin in the game, and this can cause conflict for ESG investors.
If you are a bond investor you don’t get the opportunity to vote. You either lend the company or country money, or you don’t. Of course, supply and demand will affect the coupon and credit quality and duration and that will start to sway the action of the board. It seems to me that bond investors have more power in forcing change than equity investors. If the bond market dries up for non-compliant companies, they will then be forced to raise capital via the equity markets and then the ability to vote will really become front and centre.