ESG Cop Out

I’ve recently been re-examining my investing strategy though emerald-tinted lenses.

It’s over a year since I first researched ‘greener’ investing and it’s an investment motif that continues to gather pace. As of this summer, ESG funds are the fastest growing segment of the European funds market.

Last year I found some evidence that ESG investments, although pricier, may not lead to significant underperformance vs. traditional funds. Although the space remains young, a recent comparison of ESG and non-ESG fund performance reinforces this conclusion.

And yet, I’ve not altered my investment strategy in this regard.

Greenwashing

I think my biggest concern with ESG finance is greenwashing; the fad of pinning ‘green’, ‘SRI’, ‘ESG’, ‘choice’ or any other euphemistic label to an investment in exchange for higher fees and/or worse performance. I suppose I don’t like the idea that I’m being taken for a fool.

For example on the savings front, NS&I launched their Green Savings Bonds earlier this Autumn. They come with a three year, fixed interest rate of 0.65%. Alternative fixed-rate products come with rates of about 1.8%.

Yet you can reconcile yourself with the pitiful interest rate because, “the Government will publish details about how the money is being spent and what the environmental benefits are, so you can see the difference you’re making.

The areas that HM Treasury will spend funds raised through Green Bonds and Gilts on:
• Clean Transportation
• Renewable Energy
• Energy Efficiency
• Pollution Prevention and Control
• Living and Natural Resources
• Climate Change Adaptation

Digging a little deeper, the money raised from the bonds will actually “be held in a general account” and the treasury “plans to allocate an amount equivalent to the proceeds raised from Green Savings Bonds, to its chosen green projects, within two years.”

Perhaps I’m overly sceptical but it seems a plan that can easily be weaselled out of, as is the Government’s want (/modus operandi).

False advertising

What about pensions? Being green may help the planet survive long enough for you to enjoy your (early) retirement, so a responsibly invested pension sounds reasonable.

In a recent trip to the big smoke, I saw an advert for an ‘ethical pension’, replete with language intended to sink its tenterhooks into the ESG-leaning individual. “Feel good about your future”, it said, “stay true to your values” and “make your pension greener”.

I took a peak under the hood of these ethical pensions vehicles. I honed in on the 90% equity (a.k.a “adventurous”) fund. It contains a motley mishmash of other funds, with a wonky geographical weighting (UK weighting 30-35%).

What about its ESG credentials? Well the fund factsheet states that some components may still invest in companies associated with nefarious activities, provided they earn no more than 10% of their profits from said activity. As such, the provider “cannot guarantee that our Plans won’t contain some degree of the activities we aim to exclude“! Oh.

The holdings within the fund are hardly ethically squeaky-clean and, with a 0.6% platform fee and a 0.7% fund fee, its significantly pricier than other (ESG) investment/pension fund options.

Clear as mud

This mislabelling of investments partly stems from the broad variety in ESG classifications, ratings and regulations. Various companies have different methodologies for calculating ESG ratings – a lack of consensus is a hindrance, if not outright harmful.

The FCA, in their update on the guiding principles for funds within the sphere, say that many fund applications “are poor-quality and fall below our expectations“. They elaborate:

“fund applications in this area often do not contain sufficient, clear information explaining their chosen strategy and how this relates to the assets selected for the fund.

Their conclusion that “consumers find it difficult to assess whether authorised funds meet their needs and preferences…there is potential to undermine trust and deter consumers from this segment of the market.” about sums up my own feelings on the matter.

Stick

For any individual, their investment choices represent just one aspect of their life that can be altered for environmental reasons. So call me a planet-hating, returns-chasing, capitalist pig, but at this juncture I’ll focus on optimising others rather than change my investments.

For, at the end of the day, I’m not looking to smooth over viridescent guilt by chucking money at an ESG-labelled fund. I want to know that my mouth and my money are doing actual good, not paying sycophantic homage to ESG principles.

I have no doubt things will improve in the realm of ESG investing, although wonder whether, much like the battle with our self-inflicted climate woes, it may be too little, too late.

TTFN,

Mr. MedFI

One thought on “ESG Cop Out

  1. I’m not onboard at all with ESG investing yet. When there’s no standard I can’t justify it. One person’s ethical company is another person’s evil enterprise.
    I suppose I’m more of an all or nothing person, if you can’t do it properly, I think what’s the point in doing it at all and that’s starting to become my attitude with the whole ESG thing.
    I’m fully open to it eventually, but in its current state it’ll be trackers and active funds for me, oil companies and all.

    Like

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