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Paraplanner view: A catalyst for investment change?

22 July 2020

In the second of three articles, Sharon Bray, senior paraplanner/head of Compliance at Taylor Money, looks at the Coronavirus as a catlyst for change in terms of our views on ESG and greener investing.

“What we do in the next ten years will profoundly impact the next few thousand” – Sir David Attenborough

This article, initially written a few months ago as the second in a series about ethical investments, set out to explain and reflect upon the varying messages around Environmental, Social and Governance investment funds. In the past few years many have begun to focus more seriously on making the world a greener place to live. However, we have all been so immersed in our hectic everyday lives that we overlooked the possibility and need to prepare for the impact of an unknown pandemic; we perhaps were naive to the certainty of our freedom and our ability to work together to adapt.

As the world begins to open its doors to a new view, perhaps like the post second world war era, it is clear that now is the time for innovation, now is the time to wake up and lay new foundations for a greener recovery. This can be done; pictures have recently emerged of mountain ranges now clear of smog, and clear waters teeming with fish in the canals of Venice. Cities such as Paris, Milan and Berlin have created pop up lanes for cyclists, originally initiated for key workers, and these now remain in place to create a safe space to encourage pollution-free travel. By leaving cars at home people are creating a new lifestyle that moves away from our reliance on transport, providing a resurgence of visits to our local shops that we had perhaps written off. From something truly awful, we should consider how we can now work together to create a more “green” normal.

What is Environmental, Social and Governance?

Most of us want to play our part in the green revolution; we strive to not only make our hard-earned money grow but to also take the opportunity to invest in a better solution. Enter ESG or Environmental, Social and Governance. Whilst terminology can differ, the goals often remain the same. These words perhaps project the confusion that you may face when looking to invest while reflecting your ethics. The difficulty arises when we start to really dissect and understand the makeup of the landscape of ethical investments.

Early ethical investments often actively excluded companies such as those whose revenues were derived from tobacco, oil, alcohol, and mining through negative screening. On the other hand, socially responsible investments took a more inclusive approach by seeking and positively screening companies who wish to be world leaders supporting human rights, environmental causes and gender equality.

As we move forward equipped with more information, reliable science and a cohesion that is challenging the norm, impact investing has now become a viable option. Impact investing represents companies that are making a tangible, positive impact on society and the environment, for example investing directly in renewable energy and social housing projects.

To provide a clearer picture, ESG factors have emerged as a way of classifying and rating companies and countries, to evaluate how far advanced they are with sustainability. Once enough data has been acquired on these three metrics (ESG), they can be integrated into the investment process when deciding what equities or bonds to buy.

ESG helps an emotive investor to seek a company that recognises the long-term impact of investing for good. These principles use a scoring system of the level of sustainability today and sustainability in the longer term.

• Environmental
Issues relating to the  natural environment: Fossil Fuels, Renewable Energy, Biodiversity Protection, Carbon Emissions, Climate Change.

• Social
Issues relating to the rights, well-being and interests of people and their communities: How employees are treated, Adequate Housing, Human Rights.

• Governance
Issues relating to the management of companies: Board Diversity, Voting Rights, Board Ownership & Pay, Political Contributions.

So how do you measure the sustainability of a company and who provides the analysis?
The above gives an overview of what may be relevant under each of the three elements of ESG however, whilst ESG is arguably reshaping the future of asset management, at present there is no universal agreement that defines ESG.
The organisations currently providing ESG ratings are those that have embraced the change and have innovated a ratings process. At present these include index companies such as MSCI and FTSE Russel alongside more analytical companies such as Sustainalytics . These ratings provide a structured comparison when choosing to invest in one company over another.
As noted in my last article, interpretation of how green, ethical or socially responsible a company is, will be subjective touching on individual emotions in different ways. The companies that rate these companies are in some respect no different, for this reason, ESG ratings can vary widely between different companies, arguably creating even more confusion.
To illustrate this, let us use Tesla as an example. Tesla, Inc. is an American electric vehicle and clean energy company based in California. The company develops and focuses on electric vehicle manufacturing, battery energy storage and solar energy panels, and roof tile manufacturing. This, we would all agree, is a company moving in a more sustainable direction.
MSCI’s ESG ratings rank Tesla at the top of the car industry for sustainability, whereas FTSE ranks it as the worst car producer globally, and Sustainalytics puts it somewhere in the middle. The discrepancy reflects the fact that MSCI judges Tesla to be almost perfect on carbon emissions because of its clean technology, while FTSE, which evaluates factory emissions, regards the firm as a serious offender for pollution. Although the prevailing technology is clean, the process by which to get there is not.
As an investor, you would perhaps expect that small companies and large corporations would cooperate, integrate and agree a scale of how they should be judged, setting a target to strive toward.
This is perhaps an exciting opportunity for companies that fundamentally are set up for profit, to work alongside environmentalists and scientists, and the experts in sustainability, to innovate and develop a system that could be clearer and transparent to all, to encourage the right behaviours when it comes to greener and ethical investments.
We can do better
To the socially conscious investor, having a selection of extra ESG focused financial information is important to the long term growth of investing. As investors, we should embrace every system that supports change.
ESG is not the whole solution however; it offers a broader approach but it is neither a single investment strategy, nor is it an inclusive strategy. It allows greater flexibility to use factors that probe the nuts and bolts of a company focusing on the initiative and management strategy.
In my final article, we will explore how Taylor Money has considered ESG analytics to innovate and create our updated ‘Investing For Good’ portfolios. These are centred around five core principles which we believe provide our clients with the power to invest in line with a more ethical viewpoint.
Let me leave you with this thought
As humans living in the developed world we could comfortably argue that our advances in technology have made us the most powerful species on the planet. If this is the case then as humans we control the actions that will fundamentally redesign the world we live in and build for our future. If this is true, then we represent the greatest chance of change in our world. If this is true, then we must stop accepting the mediocre, we have the tools and the intelligence to make true change, investing in a greener, more socially responsible planet and a fairer future for all that embody it.

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