Investing to improve the world

Savers are owners, and with ownership comes responsibility.  Investors, who own virtually all resources and productive assets in the world, have a duty to avoid doing harm while earning their return.

Happily, today’s savers expect their fund managers to invest their money responsibly. Fund managers must do this and not just to make the saver feel more comfortable.  But responsible investment policies must work in the field if managers are to retain the trust of investors and make the world a better place for us all to live.

Climate change, ending child labour, improving work practices, reducing waste, safeguarding water resources – these can only be tackled by gradually changing behaviour over time and continuing to do so.  That means a process of incremental improvement of environmental, social and governance (ESG) impacts. A one-off step change is as unlikely as it is unhelpful in allowing us to solve the underlying problem.  As the world’s population grows we are all going to have to do more with less if we want to avoid ruining the planet.

Any commercial enterprise is compelled by its owners and investors to continually drive down costs and maximise profits.  Pressure to achieve continuous, incremental ESG improvements will also only be achieved if there is ongoing incentive to do so.  This is where investor engagement comes in.  Engagement means the ESG-concerned investor stays involved for the long term.  An investment manager, particularly if properly resourced and operating globally, can help share best practice across a sector.  Its experience of efficiency innovations at a steelmaker in the US can help Asian steel producers raise their game too.   The incentive for companies to innovate also grows since the word will pass to other investors, hopefully leading to them having a higher rating and lower cost of capital.

Selling shares in impactful companies remains a powerful sanction, but has drawbacks.  It is a one-off.  The investor makes his point and walks away, giving up influence in the future.  If a sufficient number of investors think and act the same way, the recalcitrant company becomes starved of capital which could trigger change.  But what if less scrupulous investors continue to provide capital and enjoy higher returns because there has been less competition to own the shares?  The rating of the company may fall but the cashflows will remain the same.  This may have contributed to the sustained returns from tobacco companies in recent decades.

Sure, some investors would rather their funds go nowhere near certain industries.  But it is important for asset managers to approach ESG in a comprehensive way which goes beyond simple sector or company exclusions.  An approach based on continuous engagement might favour sustainable behaviour. For instance, the tobacco industry is probably the largest employer of children in the world using them to pick tobacco leaves.  These children receive each day the equivalent in nicotine of 50 cigarettes.  Staying invested in tobacco companies committed to fighting against child labour should encourage best practice within this industry and spread sustainable behaviour among peers.

A simple divestment policy prevents asset managers from effectively doing their jobs.  A best-in-class approach blends engagement and the threat of divestment.  It mobilises the competitor instincts of company managements in the same sector.  Take oil and gas.  While renewables offer the prospect of limiting global warming, it will take years before we can live without fossil fuels.  By using the best-in-class approach, the investment manager can remain invested in oil and gas companies, but only in companies with the better environmental scores. These scores are reassessed regularly; so that companies that are excluded but improve their practices may enter the investable universe in the future.  Companies in the investable universe cannot be complacent given that, if they stand still, they will be overtaken.  All the while standards across the global oil & gas industry are pressured to improve.

Some of the biggest investors in renewables are the oil and gas supermajors.  Investors want to encourage sustainable behaviour and reward such management teams for innovating and providing long term R&D support.   A pure divestment approach does neither.  A best-in-class approach is forward looking and should lead ESG-committed investors to have a higher exposure to oil and gas companies investing in renewable energies, while also having a lower or zero-weighting to companies with low ESG scores.

ESG analysis needs a careful, unemotional assessment of the facts building up to a 360 degree picture.  Monitoring the unconventional oil and gas sector means using sophisticated computer coding to calculate seismic or water contamination risk for the wells of the companies reviewed. Scale helps, since the same tools and knowledge is shared across more assets under management.  Lessons learned in one region don’t have to be re-learned elsewhere.

If the weight of the trillions of euros in investment funds is brought to bear on industries with responsible practices around the world, we should see accelerating improvement in the way businesses operate.  There is little or no evidence that ESG investments yield lower returns than conventional investments.  As governments around the world start pricing in the real cost of pollution, they could even enjoy a performance advantage


Thierry Bogaty is head of SRI at Amundi

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