Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Friday, August 28, 2020

Read Along With Ryder Part 2: ESG

Cleaning all of these magazines off of my desk is hard for me, because I don't want to miss out on the knowledge they contain. To alleviate this, I will summarize one article from each magazine as I clear it away. Click here for the last article I read.

Today I picked up a magazine called Pensions and Investments which bills itself as "The International Newspaper of Money Management." This sounds very important, and is probably why it shows up at my office on a regular basis without my prompting. Most of the articles are pretty dry details about regulatory changes in the pension and retirement benefit world. The article that caught my eye was about ESG: Environmental, Social and Governance factors in investing.

ESG is a huge topic and its importance in investing is a growing trend. There are a lot of factors that people look at when making investments, and environmental, social or governance factors are not unusual. What sets ESG investors apart, however, is how they bring these factors to the forefront of their methodology. Some investors simply want to avoid investing in companies that are bad for the environment, bad for society or simply have bad actors in control. Others want to go further and actively push for better behavior at companies that are never perfect.

Awareness of ESG factors in investing is a growing trend, and whenever you have a trend, people want to jump on board. This article begins by noting that while many investment managers say publicly that they are aligned with ESG principles, hardly any of the assets they manage have ESG factors in their formal documentation. They cite two main reasons for the low integration of ESG factors in official documentation: Lack of standard terminology and the newness of explicit ESG integration into guidelines.  The article later notes that the UK Investment Association is working on standardizing language for this very purpose. Formal documentation can backfire when the language is so vague and boilerplate as to have no meaning, as this twitter user pointed out:

The article notes progress made and progress needed. It notes that the alternative investment space has a long way to go to achieve anything close to gender parity. While women are a growing part of the financial industry workforce, women make up 8.5% to 13.5% of leadership positions, depending on the sector. When it comes to getting quality ESG advice about companies, the article notes that public companies feel that they are wasting effort engaging with proxy advisors on these matters. Progress made includes a large French public-sector pension fund accelerating their divestment in carbon-heavy industries, reflecting similar announcements by the Norwegian pension fund dumping similar investments. Institutional managers are more often considering ESG as part of their fiduciary duty - a responsibility to the end investors. 

Aside from this article, some interesting things that have caught my eye in ESG lately include a new "Social Justice" focused ETF from Adasina. The growing success of Impax Asset Management's Ellevate fund, which adds a "gender lens" to their already robust environmental focus. The Financial Times noted that ESG was getting blamed by CoreCivic, a private prison operator, for "increasing their cost of capital" - most ESG investors would probably call that a success.

Thanks for reading along with me today! ESG allows investors to better align their investment portfolios to their values. Progress is being made, but as this article indicates, it isn't a clean straight line.