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.

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 charities, trustees and the individual investor alike.

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 considerations when thinking about your portfolio.

WHAT IS ESG?

A natural starting point. 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 helps greatly to understand that this sits alongside traditional analysis. This shouldn’t be viewed as a radical investment strategy, but more 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 to get confused! Know your SRI from your CSR, and 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 any conversation around this back to factors of environment, social and governance.

A&B ESG

Why not think of it as part of a multi-solution that investment providers may offer? If you don’t already, you could select an ESG strategy to sit alongside your more traditional holdings. You may then get 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. Any end client’s ethical preferences will have to be considered in a far more robust way than is currently the case on average, ultimately being reflected in the advice provided.

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 committee or trustee meetings Detailed questions in fact finds with investment providers, with a direct mapping into an appropriate mix of investments Prepare questions for meetings with investment providers around ESG. ESG section in portfolio review meetings Seminars/training with specialist speakers to help educate and stimulate ideas An in-house glossary of ESG terms to bring you up to speed