We are so easily caught out. Ask anyone if they support child labour, hazardous working conditions and paltry pay and you’ll mostly be met with an emphatic no.
Ask the same person if they shop at [insert name of high-street fashion retailer] and they’ll most likely respond yes, oblivious to whether that company pays its Asian garment workers a living wage or rigorously checks the ages and working conditions of those workers.
I uneasily include myself in this no-longer-so-hypothetical example. And that’s despite so-called ethical consumerism — think back to the seminal anti-sweatshop campaigns against Nike in the 1990s — having come a very long way.
Ethical or responsible investing, on the other hand — the consideration of environmental, social and governance (ESG) factors when investing in listed companies — has lagged far behind. ESG factors could include anything from climate change, waste, pollution and resource depletion to working conditions, employee relations, executive pay, board diversity and tax strategy.
A responsible investor is someone who asks herself how companies stack up on these and other metrics, which are important for the sustainability of the world and its societies, and then directs her savings to the companies that perform best on an ESG basis.
Responsible investing remains largely the domain of pension funds and active asset managers. This mostly comes down to education and access.
A growing body of research shows that such an investor is not only responsible but also wise. Studies demonstrate companies that outperform on an ESG basis deliver financial outperformance in the long run. A recent Boston Consulting Group analysis of more than 300 companies in five industries — consumer packaged goods, pharmaceuticals, oil and gas, banking and technology — found that companies with strong ESG performance enjoy measurably higher profit margins and valuation multiples, while risk is lower.
A separate study by portfolio analytics provider Axioma found that investment portfolios weighted in favour of companies with strong ESG performance outperformed their benchmarks.
Yet despite mounting evidence that investing your money in a way that is better for the planet will give you the same or better returns as alternatives that are not planet friendly, few retail investors are doing it.
Responsible investing remains largely the domain of pension funds and active asset managers. This mostly comes down to education and access. Hopefully, that will change as growing numbers of ESG-screened exchange-traded funds (ETFs) are launched in the retail market. The world’s largest fund manager, BlackRock, is planning to launch six different ETFs with an ESG overlay, according to Investment Week.
Screening factors, which include nuclear weapons, civilian firearms, thermal coal and tobacco, would exclude the likes of Shell, British American Tobacco, Airbus and Rio Tinto from these indices.
In SA, Old Mutual recently launched two ESG ETFs to the retail market, which respectively track the MSCI developed and emerging markets ESG leaders indices. The financial services group plans to create an SA-focused ESG index, which will be carbon-friendly relative to its benchmark.
“We’re trying to have the same conversation with the consumer as we had in the ’90s around footwear apparel. The retail market needs to wake up. You do have a choice,” Jon Duncan, head of responsible investment at Old Mutual Group, says.
Old Mutual is also working on a “nutritional label” for the products on its wealth platform, which will enable clients to see how a fund compares with its benchmark in areas such as carbon intensity and governance.
As regulators look to compel asset managers to consider sustainability factors when investing, this may soon become the norm. In theory, if savers direct their capital to companies with the best ESG performance, firms with poor business practices will suffer an increased cost of capital, making it more difficult for them to do business.
This would decrease the likelihood of there being another Steinhoff, because investors would pull money from a company whose accounts or tax strategies they didn’t understand or if the board structure raised red flags over governance. Evidently, asset managers — many of whom are signatories to the UN Principles for Responsible Investment — paid little attention to ESG regarding Steinhoff.
As savers and investors, we have more power than we care to admit. In an increasingly passive market, active stewardship is an urgent priority.
• Ziady writes from Cambridge in the UK.
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