Ravenscroft portfolio managers David Le Cornu, far right (Head of Discretionary) and Jamie Mourant (Senior Investment Manager) on the challenges of ESG ratings
For many people, environmental, social and governance (ESG) is much more than a three-letter acronym. It’s a practical, real-world process that helps them live their lives according to their moral principles.
investing is part of the broader process and enables them to invest their money in a manner that sits comfortably with their beliefs.
By understanding how a company serves all its stakeholders (workers, communities, customers, shareholders and the environment), as well as the company’s balance sheet and business model, investors can seek to make attractive investment returns.
They can also sleep soundly at night safe in the knowledge of the impact the business they are investing in is having on the world in which we live.
The growing importance of ESG is reflected in the number of high-profile research businesses that now provide ESG ratings, including Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI and Refinitiv.
You would think this would empower investors to easily make informed decisions for a better world.
Unfortunately, things are never as straightforward as you would wish. Each firm has developed its own ESG rating system, and while their ratings will inevitably chime with each other, there will also be substantial differences between their rating systems.
At the same time, the quality of ESG ratings is increasingly being called into question, with claims of greenwashing – whereby companies overstate or misstate the green credentials of the business – rising over recent years.
One example of a successful greenwashing challenge resulted in HSBC having to pull an advert extolling their green credentials, on the grounds that the bank continues to back negatively impacting activities.
Mixed messages
The lack of a uniform approach to ESG ratings and businesses’ desires to get the best ESG rating they can for marketing purposes leaves a green fog hanging over the ESG investment universe.
Visibility is further impaired as many businesses awarded the highest ESG ratings are not actually changing their practices to be more environmentally friendly. Instead they are buying their ESG credentials by paying someone to plant trees in faraway places or by purchasing carbon credits.
It becomes clear that unless an investor is prepared to do a lot of research, they should attach a ‘Buyer Beware’ label to broad-based investments being touted as ESG investments.
Perhaps ESG funds should carry an additional risk warning along the lines of: “This investment may or may not sit comfortably with your moral compass.”
That being said, there are a range of impact funds that provide absolute clarity on where an investor’s money is being placed to work.
However, their focus on investing with the intention to generate positive, measurable social and environmental impact can outweigh their focus on generating attractive long-term returns for investors. These funds are also, by nature, concentrated on niche areas of investment markets, so can suffer very high levels of volatility.
Navigating the fog
This begs the question: is there an easy way to navigate the green fog to ensure your investments are aligned with your moral compass while targeting attractive long-term returns?
ESG will mean something different to everyone as it talks to your moral principles, so no investment will suit everyone.
Intriguingly, there is a fund offered by a local investment company that does not have an ESG or impact-based investment objective, nor present itself as a sustainable investment, which we suspect may sit comfortably with investors’ moral compasses (as it does with us, as we too are investors in the fund).
It is a diversified equity fund, so it has the potential to generate attractive long-term capital growth, and its diversified nature provides the ability to avoid the extreme volatility experienced in some impact funds.
The underlying businesses in which the fund in question invests are trying to address problems that humankind and/or our planet face. The fund is presently invested across 15 collective investment schemes that focus on environmental solutions, basic needs, emerging equality, energy transition and resource scarcity.
Knowing that some of the investors’ money is focused on positive outcomes – such as finding a cure for cancer, expediting the transition to clean energy, and providing food and clean water to those who need it – could satisfy one’s conscience and presents the possibility of not having to seek out a questionable ESG rating.
The lack of an ESG or impact label also leads one to believe that the manager of the fund is far more interested in where the funds are invested than a label that may assist the marketing of their fund.
FIND OUT MORE
If you would like to discuss responsible investing, greenwashing or discuss any other investment-related matter please reach out to any member of the Ravenscroft team:
www.ravenscroftgroup.com
Guernsey office: 01481 729100
Jersey office: 01534 722051
FINANCIAL PROMOTION: The value of investments and the income derived from them may go down as well as up and you may not receive back all the money which you invested. Any information relating to past performance of an investment service is not a guide to future performance and may not be repeated. Ravenscroft (CI) is regulated by the Guernsey Financial Services Commission and Jersey Financial Services Commission.
• This advertising feature was first published in the Funds Edition of Businesslife magazine in November 2023