Rebecca Kowalski, founder of Overstory Finance, responds to the article in Professional Paraplanner by Sharon Bentley-Hamlyn, director at Aubrey Capital Management, entitled Has ESG gone off the rails?
I am writing this article in response to the article written by Sharon Bentley-Hamlyn, director at Aubrey Capital Management. There are several points in the article which I believe warrant a response or challenge.
I have had the opportunity to interact professionally with Aubrey Capital in the past and found that a positive experience, with their employees personable, knowledgeable and helpful. In a former role, I suggested them as suitable for clients with defined sustainable or ESG preferences. I have to say I was therefore surprised to read that a senior person at the firm was expressing such strong negative views about ESG.
In my assessment of the article, I understand that Bentley-Hamlyn is bemoaning the following things:
- The direction of travel of ESG, away from what it was once perceived to be into its current condition, and its failure to encourage more ethical investing.
- The box ticking and bureaucracy associated with ESG Reporting.
- Greenwashing emanating from the ESG ratings agencies.
- The existence of social and environmental “activists”, who have hijacked the ESG investment space.
- The downgrading of company ratings, as a result of them not having enough female representation on the Board.
- Coercive regulation (no specific regulations mentioned).
- The application of the investment practice of stewardship and shareholders’ voting rights.
- The way that some corporations’ express their views and act in line with them to encourage certain social outcomes.
- The UK government’s Net Zero measures.
- Any person or organisation who interferes with the markets and the rights of the individual.
I would like to comment on each of these points with a view to achieving the balance that Bentley-Hamlyn appeals for in her piece. On one or two points, I can agree or at least sympathise with the critique, but in the main I am either perplexed or concerned.
In her article, Bentley-Hamlyn says of ESG that:
“what might have been a framework to encourage more ethical investing had become a bureaucratic nightmare of box ticking, supported by a ratings industry that has helped large investment management companies greenwash their funds.”
I commend Aubrey Capital’s focus on ethical exclusion of harmful businesses and the author’s wish to see ethical investing encouraged. Life was probably simpler when environmental, social or moral views only entered investment and/ or financial advice conversations when a client answered in the affirmative to the “do you want to invest ethically” question. Life was perhaps also simpler before the internet, but for all its complexity, risks, imperfections and distraction, I don’t think many of us are ready to pop that development back into the box and lock the lid.
We operate now in a world where investors have far more choice when it comes to investing along the Spectrum of Capital. Choices regarding how rigorously values are followed blend with varieties of motivation, ranges of conviction, individually prioritised preferences, and differing degrees of divergence from the established investment norms of either client or adviser. No longer can we only have “any colour you like, as long as its black.” In the 2020s, we can pretty much have any colour of the rainbow and a technicoloured dream coat too. If one specific shade is not increasing in popularity, that isn’t the fault of one of the other colours but rather of other influencing trends and practices.
The only way to make sure that all parties can make fair and informed choices is by improving education and communication within the industry. We need to ensure that investors see personal choice as a positive and an additional reason to engage with and entrust the investment industry. ESG still means many different things to different people but, with a little thought and effort, it is perfectly possible to find out the type of businesses and activities an investor would like to avoid or favour, and why.
I also understand the author’s frustration with the “box-ticking” aspect of ESG (more advanced in Europe, Bentley-Hamlyn’s investment arena) and agree that the corporate scoring systems of some of the ratings agencies have been misleading. The FCA is currently developing voluntary standards in this area. There is however a reason why number crunching and reporting has become increasingly important. Finance is a numbers industry and we hold our own toes to the fire over absolute and relative growth, loss and volatility figures. ESG is just this same reckoning happening at corporate level, while science crunches the sums on the anthropogenic scale on how much carbon budget we have remaining, how much we are reducing (or not) emissions of greenhouse gases and how rapidly we are getting through the clean water, fertile soil and ecosystems we have left. When individual personal values are what we seek to honour, a respectful discussion is a wonderful mechanism. Where we are chasing the preservation of human life and civilisation on a global scale, we really need to keep quantitative track of progress.
Regarding Bentley-Hamlyn’s comment that “It looks now as if ESG is becoming something much worse, because it appears to have been hi-jacked by social and environmental ‘activists,” I have a couple of responses.
The first of these would be to challenge the culture war hijacking of the term “activist,” casting it in a negative light. The dictionary definition of an activist is a “campaigner,” “reformer,” “champion,” “advocate” and demonstrator.” While the latter description might be seen by some as an activity that causes disruption to business as usual, the other terms are positive ones. An activist is, in my view, someone who heeds, acts, seeks positive change, is brave, bold, a leader, perhaps sharing some of the traits of the high conviction active investment managers that are often held in high regard in this business, including Bentley-Hamlyn herself.
When it comes to hijacking ESG, this suggests these unwelcome activists are boarding the ESG plane and trying to get it to fly to a different destination. In fact, if we are referring to activist investors, they are far more likely to be steering their own, high-speed, direct to destination vehicle in order to achieve faster social and environmental impact. Again, as with the colours analogy mentioned earlier, we have more than one mode of transport to choose from.
We then get to the author’s regret that some companies may be downgraded as an investment as a result of not displaying gender equality among their senior staff. This one surprised me, given Bentley-Hamlyn has championed female opportunity in various ways. I agree that there may be times when there is simply no suitable female candidate available for a role, as the author explains:
“There simply are not enough qualified women coming forward for such roles, or indeed entering certain industries and progressing to this level.”
I acknowledge that it could be considered unreasonable to expect one company to tackle a long-held, slow-to-change social, cultural or political problem. However, when companies are downgraded by ESG ratings providers on gender equality, this is usually based on the level of risk or disadvantage this is likely to cause the company. Does a business’ lack of diversity adversely affect its decision-making, insight and richness of experience? Does it impact its ability to recruit, attract investment or retain custom? ESG products and strategies do not exist to change the world for women but to measure whether a business has a well-rounded workforce. Furthermore, as is the case at Aubrey, an investment house does not have to slavishly follow the ESG ratings providers, but can operate their own in-house processes for determining which elements of the environmental, social and governance issues are most relevant for a potential investment. If a company receives a lower score, this does not even (as Bentley-Hamlyn suggests) mean that it needs to be sold, it could mean that it is underweighted or only purchased if the price is right. It all depends on a fund’s particular ESG strategy.
I am confused by the author’s strong reaction to these ratings and ranking of businesses on ESG issues, given that as an active management house, under current UK regulations, her firm could choose to ignore them, potentially achieving outperformance and justifying fees by doing so. If it is the more advanced and stringent EU sustainable investment regulations (SFDR) that are the issue, it would be helpful to clarify this. It would also be informative if the author confirmed precisely what she refers to in the comment “when regulation starts to become coercive.” Which regulation does this mean – EU legislation or possibly UK government Net Zero legislation which has been passed into law and which Bentley Hamilton also deprecates?
“It is about achieving the right balance, and when we start getting ‘diktats’ as to where we can travel, what mode of transport we can use etc, we can be pretty sure we will not achieve the balance most of us seek.”
This to me is a step away from the world of investing into the messy world of politics and I am surprised that the author goes there, given she decries when “corporations start to espouse political ideologies.” The widely recognised role of UK finance, as supported by the government, the opposition, the FCA and key elements of our finance system such as the London Stock Exchange, is to help fund Net Zero and align its investments with its decarbonisation mission. Bentley-Hamilton is aiming to hold back the tide, against the current of improved energy security and affordability, lower carbon pollution, creation of jobs and new business deals in parts of the world where green money and legislation is flowing faster (such as with the US Inflation Reduction Act).
As well as a critique of decarbonisation of the economy, the author also finds fault with the manoeuvrings of the investment world.
“Investors withdraw or vote against management in AGMs because companies are not fulfilling certain social criteria.”
As Director of a firm that is a signatory to the UN Principles of Responsible Investment” (UNPRI), it seems to me rather contradictory to disapprove of other firms acting in line with these principles. There are six principles in the UNPRI; principle 2 states that:
“We will be active owners and incorporate ESG issues into our ownership policies and practices.”
The explanation of this principle lists a range of possible actions that demonstrate compliance, including the exercise of voting rights, participation in the development of policy, regulation, and standard setting (such as promoting and protecting shareholder rights) and filing shareholder resolutions consistent with long-term ESG considerations. These acts are all considered part of how a responsible, active manager should conduct themselves. They are also, in my view, an extremely valuable way of empowering the capital of smaller investors through the pooling and steering of their money. This is an added benefit of investment that empowers and offers the individual the ability to influence in areas they could not access in any other way.
As Bentley-Hamlyn says, “the decision of where to invest should be left to individual investors” and every individual investor should have the choice of whether to invest with a fund manager who is actively striving to achieve positive environmental and social outcomes, as well as financial ones. The free market that she favours may influence financial returns but no longer has license to fluctuate all over the health of the planet and wellbeing of the people living on it.
The question is not whether ESG has gone off the rails but rather whether ESG and its ethical, sustainable and impact aligned siblings can keep capitalism on a responsible track.
