You’re probably aware of the growing concern over ‘greenwashing’ by fund providers. The most recent incident involved a former employee’s allegation that German asset manager DWS had misrepresented the sustainability credentials of its funds. (DWS rejects these accusations; financial regulators in Germany and the US are investigating.)
“Can it be true? That I hold here, in my mortal hand, a nugget of purest… green?” Lord Percy, Blackadder II, ‘Money’
Unfortunately, this isn’t an isolated incident. In fact, it is part of a pattern: regulators in a number of major financial markets are looking into the potential misrepresentation of funds’ sustainability credentials. Here in the UK, for example, the FCA recently set out its principles for ESG-labelled funds after seeing a number of what it regarded as poor quality applications. In the US, the SEC is growing increasingly vocal on the same topic.
There is no ‘magic green button’
Over the past few years, a significant number of existing funds have been rebadged as ‘sustainable’. At first glance, this may appear to be an impressive feat, especially given that (to the best of our knowledge) there is no magic green button that can be pressed to identify sustainable investments…
The last five years have seen hundreds of ‘sustainable’ funds being launched – or repurposed
Source: Morningstar Research. Data as of December 2020.
While various tools may help reduce the ESG risks associated with a portfolio, reducing its ESG risk score is not the same thing as investing in companies that are genuinely more sustainable or which have a positive impact. This, we believe, requires far more consideration…
We have already written about the dangers of mechanistically framing ESG solely in the context of a company’s operational practices (which most investors still do). This is a convenient approach if you simply want to rebadge an existing portfolio as ‘sustainable’. But this is rarely what most end investors are really seeking.
We believe that an authentic approach to sustainable investing requires a dynamic strategy. One that is built around careful consideration of the sustainability not just of a company’s practices but, fundamentally, of its products. It also means scrutinising aspects of a company’s corporate social responsibility – such as its culture – that are not easy to measure or to capture in a single sustainability ‘score’.
In fact, a number of the companies that we invest in and which we believe are hugely (positively) impactful, actually score quite poorly on the overly mechanistic frameworks used by third-party providers. These include companies like Everbridge (mass-emergency communications), Chegg (online education) and Veracyte (genomics testing focused on oncology).
Incremental change is not enough
To be blunt, responsible investing in its various forms hasn’t delivered much over the past 30 years. In the face of challenges that are growing at an exponential rate, investors have often been sold the story that slightly better business than usual is enough. It isn’t. Targeting ‘net zero’ by 2050 is just the most recent example of this type of behaviour – it is the ESG equivalent of kicking the can down the road.
The hard reality is that incremental progress towards greater sustainability is no longer sufficient; what is really required is transformational change. We believe we are far more likely to find this change where there is disruptive innovation rather than by taking the more traditional approach of investing in established, incumbent companies, which, almost by definition tend to favour the (often unsustainable) status quo.
Why we value transparency
“I think investors should be able to drill down to see what’s under the hood of these funds.” SEC Chair Gary Gensler, addressing concerns regarding ‘greenwashing’.
We’ve previously written about the importance of investing in companies with authentic leadership. And transparency is a big part of authenticity. As SEC Chair Gary Gensler observes, this should also be a critical requirement of ESG fund providers.
We suspect that most end investors, when they decide to invest ‘sustainably’, are hoping that their investment manager will invest their money in companies that are changing things for the better.
Given that we demand transparency from the companies we invest in, it only seems fair to be as transparent about our fund as possible by providing a positive impact rationale for all of our holdings. We hope that any investors who accept our invitation to look ‘under the hood’ of our fund will find a variety of companies that are having a genuinely positive impact and so helping to create an authentically positive future.