Debunking six ESG myths

Myth 1:  It’s more expensive

The most com­mon refrain voiced by naysay­ers when it comes to sus­tain­able invest­ing is the fees are much high­er and it doesn’t sig­nif­i­cant­ly out­per­form the rest. That’s a mis­con­cep­tion. Morn­ingstar has analysed 4,900 invest­ment funds domi­ciled in Europe, includ­ing 745 sus­tain­able open-end­ed and exchange-trad­ed funds. Hort­ense Bioy, direc­tor of sus­tain­abil­i­ty research, Europe, Mid­dle East, Africa and Asia-Pacif­ic, at Morn­ingstar, says: “We found in Europe, active envi­ron­men­tal, social and gov­er­nance, or ESG, funds charge low­er fees than active non-ESG funds across the vast major­i­ty of cat­e­gories. I would attribute this to the increased com­pe­ti­tion among ESG funds as their pop­u­lar­i­ty grows.” This was par­tic­u­lar­ly appar­ent in the cat­e­gories US large-cap blend equi­ty and Europe large-cap blend equi­ty. In both cat­e­gories, ESG funds are 30 per cent cheap­er on aver­age than their non-ESG coun­ter­parts. How­ev­er, pas­sive ESG funds tend to charge a small pre­mi­um rel­a­tive to their plain-vanil­la pas­sive peers. “That’s because the lat­ter have cut fees very aggres­sive­ly in recent years, with funds charg­ing fees as low as 0.05 per cent,” says Bioy. This year ESG funds have seen record inflows spurred by the pan­dem­ic. Should glob­al inflows con­tin­ue to rise, fees are like­ly to decrease fur­ther, as providers vie to attract cus­tomers.

Myth 2: It doesn’t perform as well financially

The major­i­ty of ESG funds have out­per­formed their tra­di­tion­al peers over three, five and ten years, accord­ing to Morn­ingstar. Over the ten years to 2019, some 59 per cent of sus­tain­able funds (defined as ESG funds in this research) have beat­en their tra­di­tion­al coun­ter­parts. Across the indus­try, ESG invest­ments have shown to be more resilient dur­ing the mar­ket crash brought about by coro­n­avirus. This is part­ly due to their focus on tech­nol­o­gy stocks and avoid­ance of car­bon-inten­sive indus­tries like avi­a­tion, which have suf­fered as a result of the pan­dem­ic. But it also reflects a wider mind-shift among investors. “The COVID-19 pan­dem­ic has rein­forced the val­ue of sus­tain­able invest­ments,” says William de Vries, direc­tor of impact equi­ties and bonds at Tri­o­dos. “When it hit, we were faced with mas­sive mar­ket volatil­i­ty and uncer­tain­ty; how­ev­er, our fund man­agers took steps ear­ly to respond quick­ly.” He says their defen­sive posi­tion­ing has meant the Tri­o­dos Pio­neer Impact Fund out­per­formed its bench­mark by 7 per cent in the first half of 2020. Sus­tain­able invest­ment has been on the rise over the last few years and the pan­dem­ic may be a turn­ing point for the sec­tor to con­tin­ue its march into the main­stream. The UK’s Invest­ment Asso­ci­a­tion reports a record inflow of £7.1 bil­lion invest­ed in respon­si­ble or sus­tain­able funds so far this year, which is near­ly four times the £1.9 bil­lion that flowed into the sec­tor over the first three quar­ters in 2019. 

Myth 3: There are only a very limited number of sustainable investments

Sus­tain­able investors tend to use a neg­a­tive fil­ter to exclude so-called sin stocks, such as oil, weapons and tobac­co, while focus­ing on com­pa­nies that have good envi­ron­men­tal, social and gov­er­nance cre­den­tials. This means a vast range of prof­itable stocks get exclud­ed from the investable uni­verse. But that doesn’t mean there’s not enough to choose from. “We’ve curat­ed over 400 com­pa­nies in the Clim8 port­fo­lio that have a prod­uct or ser­vice that’s mak­ing a pos­i­tive dif­fer­ence to cli­mate change,” says Dun­can Gri­er­son, founder and chief exec­u­tive of Clim8 Invest. The start­up has raised £1.8 mil­lion on Crowd­cube this year for its dig­i­tal plat­form that focus­es on sus­tain­able invest­ments in clean ener­gy and tech­nol­o­gy, sus­tain­able food, smart mobil­i­ty and recy­cling. “The prob­lem appears to be one of per­cep­tion,” says Gri­er­son. “The impact invest­ment indus­try needs to do bet­ter at edu­cat­ing peo­ple that there are alter­na­tives which will deliv­er a great return finan­cial­ly and a more secure future for them and the plan­et.”

Myth 4: It’s all just greenwashing

While there are iso­lat­ed cas­es of green­wash­ing, in par­tic­u­lar when funds fail to exclude indus­tries like weapons, the sus­tain­able invest­ment sec­tor con­tin­ues to devel­op reli­able met­rics to ensure it deliv­ers on its promis­es. A key issue is a lack of shared def­i­n­i­tions. Rat­ing agen­cies have dif­fer­ing scores and invest­ment man­agers apply their own fil­ters and def­i­n­i­tions. There­fore, the qual­i­ty of “respon­si­bil­i­ty” or “sus­tain­abil­i­ty” in funds varies. “With such diver­si­ty in the rat­ings them­selves and the scor­ing cri­te­ria used, and then the inter­pre­ta­tion and use of these data points, it’s not unsur­pris­ing some are scep­ti­cal when look­ing at ESG funds,” says Amy Clarke, chief impact offi­cer at Tribe Impact Cap­i­tal, a wealth man­ag­er. “It high­lights why the work of reg­u­la­tors glob­al­ly, includ­ing the Euro­pean Union on its Sus­tain­able Finance Action Plan is so impor­tant; tax­on­o­my and labelling are two of the ten-point action plan that aims to address this issue.” Sophie Lawrence, senior eth­i­cal, sus­tain­able and impact researcher at Rath­bone Green­bank Invest­ments, echoes this point. “There is a need to build con­sen­sus on how to mea­sure, assess and report impacts on envi­ron­men­tal and social issues in a con­sis­tent way, to bring fur­ther cred­i­bil­i­ty to ESG invest­ing,” she says. “The Impact Man­age­ment Project, a prac­ti­tion­er com­mu­ni­ty of over 2,000 organ­i­sa­tions includ­ing Rath­bone Green­bank Invest­ments, has gone some way in doing this.”

Myth 5: You need a financial adviser to invest responsibly

Just like dat­ing, which no longer requires a match­mak­er, invest­ing no longer relies on a mid­dle per­son. For decades, invest­ing was the pre­serve of a small group of the well informed and sus­tain­able invest­ing even more so. But over the last two decades, the rise of the inter­net has brought invest­ing to a larg­er group of peo­ple. Self-direct­ed invest­ing is acces­si­ble from as lit­tle as £25 or £50 a month, which enables those who have his­tor­i­cal­ly kept their cash in a sav­ings account to access the stock mar­ket direct­ly, with­out need­ing a finan­cial advis­er. Most invest­ment plat­forms have ESG funds on offer and some plat­forms, such as EQ Investors, exclu­sive­ly focus on invest­ing in com­pa­nies with a pos­i­tive impact. “In 2020 you don’t need a finan­cial advis­er to invest eth­i­cal­ly,” says Clim8 Invest’s Gri­er­son. On dig­i­tal plat­forms, peo­ple can choose their own funds as well as opt­ing for curat­ed port­fo­lios. When assess­ing how green an invest­ment is, Gri­er­son says, “our pri­ma­ry fil­ter is the impact a com­pa­ny is mak­ing on revers­ing cli­mate change, and then the exper­tise of the man­age­ment team and how sus­tain­ably run the busi­ness is”.

Myth 6: It’s just for millennials; retired people don’t want to invest sustainably

It’s often said that sus­tain­able invest­ing, just like take­away lattes and bal­ayage hair dye, is the pre­serve of mil­len­ni­als. It’s true sus­tain­able invest­ing appeals to most mil­len­ni­als. In 2019, a Mor­gan Stan­ley Insti­tute for Sus­tain­able Invest­ing sur­vey of investors found 95 per cent of mil­len­ni­als express an inter­est in sus­tain­able invest­ing. But so did 85 per cent of the gen­er­al pop­u­la­tion. The Great British Retire­ment Sur­vey by inter­ac­tive investor revealed that only 50 per cent of retirees in the UK aren’t inter­est­ed in eth­i­cal, or sus­tain­able, invest­ing. Mean­while, 31 per cent of those who are already retired are inter­est­ed and 19 per cent already invest eth­i­cal­ly. What’s more, 56 per cent of all UK investors have increased their allo­ca­tions to eth­i­cal funds over the last five years, accord­ing to KPMG. John David, head of Rath­bone Green­bank Invest­ments, says their clients span the full age spec­trum from young­sters with Junior ISAs to nona­ge­nar­i­ans. “Many of our clients are retirees, choos­ing to invest their port­fo­lios in line with their val­ues,” says David. He con­cedes that mil­len­ni­als are an impor­tant dri­ver of sus­tain­able invest­ment, but social and envi­ron­men­tal inter­ests are appar­ent in all age groups, from Gre­ta Thun­berg to Sir David Atten­bor­ough.