Ethical Investing is trendy. (Or ESG, Sustainable, Responsible - call it what you like).
Billions of dollars have flowed into ethical branded investments over the last three years and projections are that billions more will in the forthcoming years. Multi billion dollar industries have been created around the trend, with organisations flouting their ESG, Ethical, Responsible, Sustainable characteristics.
Hundreds of indices have been created, investment research products and measures have been developed, indicators and metrics have been promoted, to make it easier for investors to see through the publicity claims and greenwashing.
However, alongside these developments there are incongruities. The recent expulsion of Tesla from the S&P 500 ESG index (because of issues including claims of racial discrimination and handling of investigations into crashes linked to its autopilot vehicles), while Exxon Mobil (a major Fossil Fuels producer) remains on the index, and Phillips 66 (An oil refiner) was added, raises questions about the methodology around the creation and maintenance of this index. These questions can be expanded to apply to all indices and metrics.
A graph showing the co-relation between ethical ratings of five main rating agencies, produced by one of our fund managers Alphinity, clearly shows no relationship between the measures. Where is the consistency in approach to ethical investing? (Check out the graph above).
These are just two examples of the conflicts in information. At this stage, we have given up trying to compare the carbon emissions of the funds that we analyse as fund managers use so many different metrics to tell us what they are (and they aren't easily compared). There are many more conflicts.
The pretty pictures and ratings in the research that we purchase from the major research houses don't appear to have any consistency when we do our deep dives into what the fund managers are actually doing with their voting practices, their policies and processes and the actual investments that they hold.
Greenwashing and confusion is alive and well in ethical investing. This is a continually evolving area of investing, and the regulators are starting to show an interest in the area (but like all of us, they have a lot to learn).
It would be nice to have a straight forward formula to make life easier, but ethical investing is far more nuanced than that.
Ethical investing starts with understanding our clients beliefs and values and preferences, which is more complicated than projecting what investment returns and how much money they will need to make their money last and achieve their goals.
At Moneyworks we invest a lot of time in research, analysis and understanding what our recommended fund managers are doing in their ethical approach to investing, to make sure that they are walking the talk. This involves checking the actual underlying holdings of each fund, talking to our fund managers about what they are doing and why, and understanding the role of active engagement in their process.
The fund manager analysis then needs to be overlaid with extensive research, analysis, reading, participating, watching of information relating to what is happening in the world of ethical investing, it has so many moving parts.
So, if someone tells you they are an ethical (ESG, Responsible, Sustainable) fund manager or adviser, take a second look and work out whether these are just words and they are using a formula, or whether they are actually putting in the work to do deep analysis and understand that is required to actually deliver an ethical solution.