Financial Times: What you should know about environmental social and governance considerations when investing

FINANCIAL TIMES

What you should know about environmental, social and governance considerations when investing

ESG is front of mind for many investors these days. Silvertree Risk & Wealth Management invest in a range of products for their clients with this philosophy and Rayne Naude at Allan Gray recently shared her views on the proliferation of new product offerings, initiatives, and rating systems when it comes to ESGs.

“Given the pace and volume of change, it can be difficult for investors to separate the fundamentals from the fads,” explains Adams from Allan Gray.

According to Adams, asset managers may use multiple responsible investing strategies that span the spectrum between traditional investing and philanthropy.

At Allan Gray they favour the responsible investment strategies of ESG integration and

engagement across all their clients’ funds. “We spend significant time qualitatively assessing a company’s ESG risks and opportunities, trying to distil which of these factors are most material.”

People are becoming more conscious of their environmental impact and the environmental and social impact of the products and services they use.

Investors need to be responsive to these changes; “for example, we should consider factors like company transparency and traceability in supply chains,” Adams says.

While the above is positive, there are some concerns about potential unintended consequences when it comes to the ESG movement currently taking the investment industry by storm. “For example, initiatives encouraging fossil fuel divestment have resulted in some companies unbundling their ‘dirty’ assets or selling them to relieve themselves of this ESG pressure, often to a private company that is subject to far fewer disclosure requirements than its listed counterpart. In these cases, production is of course not halted; in fact, in some cases, it has been substantially increased post-sale, as the acquirer seeks to maximise their profit,” Adams says.

“Similarly, in the United States, the number of oil rigs operated by private operators surpassed those of listed companies for the first time in 2021. While listed companies have been subject to huge ESG pressure not to invest in further supply, the reality is that, while demand persists, there will always be someone willing to fill the gap. We, therefore, think that it is more constructive to engage with listed companies on responsibly managing their fossil fuel assets. Glencore, for instance, has committed to keeping its coal assets but winding them down responsibly over time, while using its substantial cash generation in the interim to invest in its future-facing commodity basket, including copper, cobalt, nickel and zinc. We are comfortable with this approach.” According to Adams, ESG initiatives, including investor climate initiatives and engagements, are often carried out in pockets, applying pressure on companies and sectors unevenly. “Again, this uneven pressure may have the unintended consequence of simply creating distortions instead of achieving solutions. The focus on listed oil majors such as BP, Shell, Total and Exxon is a good case in point: These companies face a huge amount of ESG scrutiny, activism and litigation, but are only responsible for 13% of global oil production. On the other hand, national oil companies (NOCs) produce over half of the world’s oil supply,” she adds, explaining that not only are NOCs subject to less environmental scrutiny and litigation but they are also controlled by governments whose political and social regimes often raise real red flags. “The Russia-Ukraine conflict has demonstrated that these red flags can quickly escalate into crises that have ramifications for the whole world and should thus not be ignored. It is therefore important to balance the energy transition we support with energy security and the management of growing geopolitical risks.”

UNDERSTANDING THE DATA

In addition, Allan Gray has also spent a lot of time looking into ESG ratings and data providers. “Research from multiple institutions shows a low correlation between the ESG scores that these providers assign to companies, demonstrating the complexity and nuanced nature of ESG evaluations. While this is not a problem in itself – asset managers also have differing views on the investment case for companies – the issue is when clients view one provider’s ESG scores as a perfect proxy for ESG performance when it is simply one organisation’s assessment of such. We believe it is impossible to convey all the complexities of ESG in one final score. There are benefits to using external ESG data and rating providers for ESG data collation; however, we continue to favour an in-house approach when it comes to integrating ESG into our investment research and decision-making.”

With this balanced approach Allan Gray is confident that, even where clients may disagree with their conclusions (as is expected when tackling such complex topics), they are able to find some reassurance in the breadth and depth of their ESG research and assessments.

For more info on making discerning choices between the fads and the fundamentals of ESGs, get in touch with the team at Silvertree Risk & Wealth Management.