GREENWASHING: FAKE NEWS OIL AND THE ENVIRONMENT

SAUL FULDA | INVESTMENT ANALYST

We hear the phrase ‘fake news’ batted around regularly the fund management industry. Since 2010, the number of these days. The infamous quote, launched into our UK ethical funds has almost doubled, with investment houses vocabularies by President Trump, is often used in the desperate to outshine one another by slapping a big ethical political arena, but it is only a matter of time before we badge on the front cover. Stretching the net wider, US$45.6bn see the phrase making headlines in the financial world. flowed into global sustainable funds in the first three months Two events spring to mind which depict companies of 2020, which sits alongside the 1,000+ MSCI ESG indices. spewing fake news about their ESG credentials. Thus, the demand is certainly there for ESG investing, but Earlier this month, Octopus Energy, which promises to offer the-talk and those which walk-the-walk. energy that is good for the planet, was ditched by Friends of This phenomenon is making ESG investing increasingly production of fossil fuels, further details would have been most company’s ESG credentials. The same issue can be seen in investors must differentiate between the companies which talkthe Earth, after the energy company received investment from While Mr Looney’s ambitions may seem ludicrous, some an Australian coal and fracking group. oil majors comprehend the direction of travel within the industry and fit firmly into the latter category. Take Equinor, Similarly, following George Floyd’s tragic death, company the Norwegian oil giant, which has invested huge sums into after company tried to show their support for Black Lives offshore wind farms. While renewables may only account Matter on social media; the black square became a symbol for c.10% of Equinor’s Net Asset Value, the progress made espousing the cause. This gesture, while has given the company a first-mover advantage and virtuous, inadvertently put pressure on provides the goods at the back of the shop to companies to speak out, with those the ESG’s shop window; they are walkingwho were slow to react receiving harsh criticism. But how many “The transition to an the-walk. It goes without saying that value creation from hydrocarbons will of these companies truly stand environmentally-friendly inevitably remain high, but Equinor up for truth, justice and racial equality? future will not happen will produce less oil in a low carbon future and shift its business overnight, and outlandish towards a more green-focused Without getting boggedclaims from the leaders mandate. down by the racial disparities plaguing the US, both stories of oil, gas and mining The transition to an lead to the same conclusion; companies are arguably environmentally-friendly future namely, it is easy for companies to put on a show when it worth less than the paper will not happen overnight, and outlandish claims from the leaders comes to their integrity, positive they were written on.” of oil, gas and mining companies are environmental impact and racial arguably worth less than the paper they and gender equality. This poses a were written on. The investment world serious question; if the largest group to needs actions rather than words. Initially, invest in the UK solar energy sector is also it was acceptable to place an ESG badge on the forging partnerships with traditional, carbonname of a fund; it was unique and offered investors heavy businesses, and if companies are fabricating the truth exposure to something different. Today, however, the sheer in showing their support for racial equality, how are we able to number of ESG funds, and the fake news surrounding the trust companies ‘green-branding’? sector, has fizzled the lines separating ESG and non-ESG difficult. Cynical marketing ploys are throwing an ESG It is critical to look deeper than the top-ten holdings of a fund/ tag on virtually anything to jump on the bandwagon. Even investment trust, and critically analyse the screening process the oil majors are getting involved. BP’s Chief Executive, used to ensure the underlying holdings match the green Bernard Looney, has pledged to eliminate the carbon footprint branding. Likewise, when choosing individual equities, we from its operations but failed to outline any intricacies; look past the fake news and warped marketing on social media Glencore’s Chief Executive, Ivan Glasenberg, labelled the to hand-pick environmentally-friendly stocks as and when target as “wishy-washy”. With BP’s cash-flows knotted to the instructed by a client. welcome. That Equinor, one of Europe’s oil majors, has invested billions This, alongside scandals such as the Volkswagen diesel headlines; BP may be the shop window, but Equinor is the emission fraud, helps to illustrate the opaque nature of a goods at the back of the shop. funds. into green energy projects highlights the need to look past the

ACTIVE OWNERSHIP Investors take a more active role in their share ownership, including voting, attending AGMs and engaging company management on ESG related issues.

THE

BEST-IN-CLASS An approach to investing that focuses on investments in companies that have historically performed better than their peers on ESG. This typically involves positive or negative screening, or portfolio tilting, to include or exclude companies from portfolios.

CARBON FOOTPRINT A portfolio’s carbon footprint is the combined carbon emissions of each company held, proportional to the amount of stock held in the portfolio. It can be a useful quantitative tool that can inform the creation and ongoing management of a portfolio which seeks to support broader climate change strategy.

CLEAN TECHNOLOGY Products, services and processes that use fewer natural resources and cut or eliminate emissions and waste.

CORPORATE RESPONSIBILITY This is the concept that a company has a responsibility to operate its business in a way that does not harm the environment or society as a whole.

DIVESTMENT The act of selling or otherwise disposing of shares or other assets, either in full or in part, to remove holdings from a portfolio that do not fit with an ethical mandate.

DECARBONIZATION Decarbonization is the process of reducing the carbon intensity of worldwide energy use. Investment portfolios can be decarbonized.

ESG INTEGRATION An investment approach that takes into consideration a range of sustainability and ESG-related risks and opportunities.

GREENWASHING Overselling or dishonestly communicating the environmental benefits of a product, service or organisation in order to make a company seem more environmentally-friendly than it really is.

A B C OF ESG

GREEN INVESTING An investment philosophy that considers and makes decisions based upon the environmental impact of the investment.

IMPACT INVESTING An investment strategy where investors choose to provide capital to companies who are specifically focused on generating returns while providing societal or environmental benefits.

NEGATIVE SCREENING An approach that narrows the investment universe, for ethical reasons or to meet specific investment criteria. It works by excluding companies in certain industries, such as alcohol, tobacco, armaments or producers of fossil fuels.

POSITIVE SCREENING The opposite to negative screening, this works by specifying ESG criteria to identify investment opportunities, often using a best-in-class approach relative to peers.

QUALITATIVE ANALYSIS Detailed non-numerical analysis of company policies, practices and potential impacts, this approach is used by investment managers to avoid undesirable companies and identify and invest in companies that meet ESG-related criteria, by feeding into positive screening.

SUSTAINABILITY REPORT Company reports produced to inform stakeholders about policies, programs, and performance regarding ESG issues. Also known as corporate citizenship reports, or CSR reports.

SIN STOCKS Shares in companies engaged in activities that the investor considers to be morally or ethically unacceptable, such as gambling, pornography, alcohol, tobacco and weapons manufacturing.

THEMATIC INVESTING Investing in companies that can be classified under a particular investment theme such as renewable energy, waste and water management, education or healthcare innovation.

VALUES-BASED INVESTING Investing that prioritises an investor’s ethical objectives and concerns, rather than simply maximising financial returns.

HOW CAN DEBT BE SOCIAL?

ROBERTO FARRINGTON | INVESTMENT RESEARCH

A rather underappreciated area of ESG investments by retail clients is the fixed income market – particularly social bonds. However, a growing appetite in public markets has motivated more institutions to issue their debt to investors – having more than quadrupled last year’s nominal value, the social bond sector is expected to be one of the fastest-growing segments of the fixed income market. S&P Global Ratings wrote in a recent report, A Pandemic-Driven Surge In Social Bond Issuance Shows The Sustainable Debt Market Is Evolving, that, despite an investor focus on protecting portfolios during the economic effects from the COVID-19 outbreak, sustainable finance has been gaining traction. So, what exactly are social bonds and why have they been gaining popularity over recent months while the wider market continues to weaken?

Social bonds are a type of debt instrument that raise funds for social causes, such as environmental change, improving education, or for medical research. The past few months have been a turbulent time for the world given the ever-increasing backlash against fossil fuels, the medical and economic implications of the COVID-19 outbreak, and rising awareness of racial issues, all of which have acted as a beacon for awareness of social projects. This sea change has both pushed supply forces, whether that be in construction of renewable energy plants or new schools in economically-impoverished areas, as well as demand forces, with an increasing investor appetite to fund projects for social good.

Issuers of social bonds vary significantly in size and scope, whether that be the African Development Bank’s recent US$3bn raise to support African countries and companies or Karbon Homes releasing £100m to continue achieving its target of adding 500 homes to its portfolio each year. According to the International Capital Markets Association (ICMA), a not-for-profit organisation that reports on the regulation and market practice of retail bond issuance, social bonds are also being used to fund COVID-19- related expenses, from supporting struggling SMEs to funding medical research. It states, “The general population is likely to be affected by the pandemic, including by any resultant socioeconomic crisis, and social bonds, while seeking to achieve positive social outcomes for target populations, may also serve to address the needs of the general population.”

Although such products have become more mainstream in recent months, the sector has been slowly gaining traction over a number of years. One of the largest funds in the space, Threadneedle UK Social Bond Fund, has almost doubled its assets under management over the past two years. Simon Bond, the fund’s manager, has invested in various UK-focused social projects across the country, including a partnership with Leeds University which raised £520m for a campus development program. This included the development of The Edge, which is the on-campus state-of-the-art gym, and the Nexus building, which is the University’s new startup incubator. Such investments help improve the competitiveness of the University, while helping to attract world-class students to the North of England and support local businesses.

Other less well-known investments in the fund include the Co-operative Sustainability Bond, which is the first ICMA-compliant sustainability bond issue by a UK retailer. It will use proceeds for social activities ranging from enhancing its Fairtrade model to investing in more energy-efficient transport for its various operations.

Social bonds will be an area to keep an eye on in the coming years. In a world where uncertainty is rife and investors are searching for yield, such bonds can provide reasonable income while at the same time making the world a better place.

“There is the distinct possibility that COVID-19 could change the playing field for financial markets for years to come... ”

THE NEW NORMAL?

WILL COVID-19 HAVE A LASTING EFFECT ON ESG POLICIES?

The coronavirus pandemic has created severe challenges for businesses around the globe, from their initial response to the outbreak of the virus to their ongoing preparations for a possible recession. While businesses may be anticipating an eventual rebound in demand and speculating on how the postCOVID-19 world will look, questions remain as to whether the COVID19-accelerated environmental, social and governance (ESG) policies, whether considered or already implemented, are here to stay - will they become the ‘new normal’.

Over the past few years the integration of these ESG factors into investment decision-making has seen a notable rise, moving beyond what could have once been considered a trend. DWS Research Institute recently published a paper “How COVID-19 could shape the ESG landscape for years to come”. In the paper, DWS says that the pandemic is actually advancing the strategic case for sustainable investment because people are putting more money into sustainable investments. However, if this rapid acceleration towards the integration of sustainability into business models is directly tied into a response to the virus, could success against COVID-19 eventually slow down or derail progress?

Although the pandemic is far from over, many of us are starting to speculate about its long-term political, economic, and social consequences. There is the distinct possibility that COVID-19 could change the playing field for financial markets for years to come, however, it has yet to be established which lessons, if any, will have been learned from the handling of the pandemic. Will the continuing easing of the UK’s lockdown provide the economy with the boost that it so desperately needs, or is it just a matter of time before a second lockdown emerges and the economy suffers once again? Will social norms and consumer preferences be forever changed by the pandemic? And what will the post-COVID-19 consumer landscape look like? The range of outcomes is wide and undefined, with the pandemic not only revealing the strengths and weaknesses of how the country is dealing with the crisis, but also highlighting the vulnerabilities and social divisions across society.

Saul Fulda, Investment Analyst at Redmayne Bentley says: “The idea that ESG investing negatively impacts returns is a key stumbling-block to its take-off. We need to help remove this fallacy.”

Ultimately, the economy shrank by 20.4% in April - the largest monthly fall on record. Back in March, when the pandemic had reached Europe and North America, nearly all public markets saw unprecedented losses, however, ESG-related investments saw roughly half the losses of the main indices. Prime Minister Boris Johnson said the country would “bounce back” from the pandemic, and he has set out plans for a building boom. Chancellor Rishi Sunak will lead an Infrastructure Delivery Taskforce, which aims to help to remove “bottlenecks” faced by major projects. These measures will look to boost job numbers and improve connectivity for cities, towns and villages.

It might be too soon to analyse the behavioural changes influenced by COVID-19, however, it is likely it will lead to a strengthening in momentum that is propelling the sustainability movement. The social issues, such as employment conditions, social safety nets and access to health services, may move up the agenda driven by the emphasis on the importance of the “S” in ESG investing. The pandemic has already influenced a huge uptick in demand towards the digital economy as consumers explore how to live their lives with reduced social contact. This looks set to continue into the post-COVID-19 world, with the push towards digital and adaptation of remote working and socialising asking awkward questions of the previous norm.

The pandemic has made crystal clear the link between our actions and the health of the planet. In March, it was widely reported that pollution and greenhouse gas emissions had fallen across continents. As countries attempted to contain the spread of the virus, social and economic restrictions saw reduced emissions and energy usage. The Ministry of Ecology and Environment reported that the proportion of days with “good quality air” was up 11.4% compared to the same time last year in 337 cities across China. Satellite images across Europe showed that nitrogen dioxide emissions faded away over northern Italy, with a similar story across Spain and the UK. In a post-COVID-19 world, respect for and appreciation of natural assets such as cleaner air, water and healthy food may be pushed higher up the world’s agenda as consumer preference continues to modify corporate output.

The government is now in the spotlight. The decisions they make have the potential to ensure that the immense public funds now being mobilised are used to accelerate transformation towards cleaner, healthier and more resilient and inclusive outcomes.

ESG CHECKLIST

NICK WILLIAMS | INVESTMENT MANAGER & CO-CHAIR OF REDMAYNE BENTLEY’S ESG COMMITTEE

ESG – which, as I’m sure you’ll know by now, stands for Environmental, Social and Governance – investing is mot du jour in the financial advice world. It’s also an ever-increasing priority for your clients, too.

We’re in the midst of a shift in investment values. Millennials care greatly about the impact their purchases and investments have on the world, as do many investors, including around half of Baby Boomers. So, whether we are talking about the inheriting cohort or their testators, they’re likely to be interested in ESG.

Here’s what we hope is a helpful list of themes which you might like to include in your various client touchpoints.

WHAT IS ESG?

A natural starting point. If you can explain it succinctly, you’ve got more chance of engagement.

MSCI put it like this:

“ESG investing is the consideration of environmental, social and governance factors alongside financial factors in the decision-making process”.

Put simply, it’s ensuring your investing takes care of the planet and those living on it. But it will help greatly if you emphasise that it sits alongside traditional analysis. This isn’t radical investment strategy, but an extra layer of due diligence.

THE EFFECT IT HAS ON RISK...

ESG’s recent shift into the popular consciousness is due largely to the growing body of reliable evidence that it reduces risk – especially tail risk. Companies which manage ESG issues well are generally better structured and better led, with fewer compliance and governance issues. Polly Peck and Enron-like events happen far less frequently amongst those who score highly in the ESG stakes.

…AND RETURNS

Returns can be higher too, as these companies become more competitive and efficient than their peer group, and enjoy a lower cost of capital, feeding into more sustainable profitability.

THE FEEL-GOOD FACTOR

The positive financial effects are, of course, in addition to the inherent moral satisfaction that comes from knowing your money is doing its bit to make the world a better place. BUSTING MYTHS…

Investing ethically and making money are no longer mutually exclusive, but many still think they are.

Although it could get broader in certain asset classes, the choice of investment solutions is wide, but in my experience many people still feel it is quite niche.

…AND JARGON

It is a good idea to invest some time in sifting through the acronyms. ESG is a broad church with plenty of overlap and plenty of chances for the client to get confused! Know your SRI from your CSR, your Impact from your sustainable investing.

ESG, I find, has a lovely way of encompassing all of them to some degree, so you can comfortably shepherd the conversation back to factors of environment, social and governance.

A&B ESG

Why not present it as part of a multi-solution? If you don’t already, you could choose an ESG strategy to sit alongside your traditional offering. The client then gets a chance to experience the smoother nature of the performance, but the change is not too dramatic.

NEW RULES

We expect new ESG rules from the FCA in 2021. We don’t currently know the exact content but can base it on the EU proposals which preface the new standards and can safely say that ESG will have to be factored into the onboarding process. The client’s ethical preferences will be considered in a far more robust way than is currently the case on average, ultimately being reflected in the advice.

I’d suggest the following checklist as the basis for a review of how your organisation is geared up for ESG:

ESG investment offering ESG section for your investment committee meeting Flyers and sales aids Detailed questions in fact finds, with a direct mapping into an appropriate mix of investments Prepare ‘soft’ questions for early meetings. Don’t assume that, because the client doesn’t mention it, it’s not important to them ESG section in client reviews CPD modules Seminars with specialist speakers An in-house glossary of ESG terms to bring you up to speed