ESG investing: Fad or the future?

There is now great focus on investing with Environmental, Social and Governance (ESG) principles in mind. Richard Atherton, Partner and Head of Sustainable Investing at Partners Wealth Management, reflects on the drivers and his firm’s approach in this exclusive interview.

Why do you believe ESG has become such a huge trend in wealth management and do you notice any particular trends as to which clients are most interested?

Partners Wealth Management - Richard Atherton

Richard Atherton

Partner and Head of Sustainable Investing
Partners Wealth Management

Richard: I would go further than saying that ESG is a trend, even a huge one. ESG (one component of sustainable investing) forms part of a fundamental shift in how businesses are valued, moving away from only looking at profitability without consequence.

ESG is the investment industry’s response to wider pressures from governments and investors to understand the impact of businesses

To put this into context, Larry Fink, the CEO of the world’s largest asset manager Blackrock, said in 2020, “But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance. The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”

ESG is the investment industry’s response to wider pressures from governments and investors to understand the impact of businesses. This pressure has built steadily over last four years in particular, with a growing realisation from governments, industry and investors that capitalism needs to refocus from the current model of shareholder capitalism to one of stakeholder capitalism. In economics this is called the “triple bottom line”, where companies consider not only profit but also people and the planet.

ESG measures how well a company engages with natural resources, pollution and waste and climate change (Environment); its employees, suppliers and local community (Social); and how well it is run, i.e. transparency, accountability and diversity (Governance), ESG. It allows us to look at all of a company’s activities to determine if they are a good corporate citizen and not just what they produce.

As investors become increasing aware of the issues surrounding climate change and our effect on the environment (the David Attenborough effect), it is only natural that they wish to better understand how their capital is invested

As investors become increasing aware of the issues surrounding climate change and our effect on the environment (the David Attenborough effect), it is only natural that they wish to better understand how their capital is invested.  Whether it is doing good or at the very least to know that it is not doing harm whilst also generating good returns.

We have seen positive engagement across all ages, gender and asset base. Younger clients tend to be early adopters, but older clients are increasingly asking for advice on sustainable investing.

Age does play a role as younger investors tend to be accumulating wealth whilst older clients are decumulating. Older clients tend to be more conservative with the large capital sums that will be used to provide them with income for life. So, for these clients we need to dispel some of the myths still associated with sustainable investing namely high fees and performance drag.

There are two themes that connect many clients. The first is that they are interested in investing sustainably but lack the knowledge and confidence to know they are making good choices. The second, is that when asked what their single most important concern would be, they want to invest and help to address climate change. From my experience these two themes cut across generations, gender and asset base.

How does ESG compare to the original ethical investing?

Richard: ESG is a positive evolution of ethical investing and its introduction has produced a dramatic change in the investment market. All companies now have their ESG metrics rated by one of six external agencies and these ratings can affect a company’s profitability.  Good ESG metrics are viewed as an indicator of good corporate management and a more flexible and forward-looking approach to doing business. This in turn makes these businesses more attractive to invest in. 

Good ESG metrics are viewed as an indicator of good corporate management and a more flexible and forward-looking approach to doing business. This in turn makes these businesses more attractive to invest in

This is a world away from the ethical funds that were launched in the 90s, which merely excluded certain businesses and sectors. The investment constraints were narrow focusing on excluding companies with exposure to armaments, tobacco, gambling, alcohol and pornography. Interestingly, at that time fossil fuels were not excluded.

Sustainable portfolios will continue to exclude or severely limit their exposure to these traditional “sin sectors”, however, sustainable investment managers can legitimately argue that it is better to engage with good actors in a bad sector than to simply divest and ignore them. That oil companies are significant contributors to the climate change problem is irrefutable. That these companies will also need to also be part of the solution is a reality. So, is it better to exclude all oil companies or should investors consider committing their capital to those (and they do exist) who are actively pivoting to renewables?

That oil companies are significant contributors to the climate change problem is irrefutable. That these companies will also need to also be part of the solution is a reality

I mentioned shareholder capitalism earlier. ESG analysis highlights those companies which are good corporate citizens and exposes those who are, well, not so good. Despite the limitations of ESG metrics they are improving corporate behaviours. Shareholders are increasingly acting on moving capital to companies with higher ESG scores. The luddites, the intransigent and those companies which are not changing quickly enough are at genuine risk of becoming “stranded assets”, with investment capital moving elsewhere. Nothing focuses the mind of a CEO more than a steady fall in the share price. So, in summary ESG is more nuanced than the original ethical investing, allows for positive engagement with companies that want to change and shines a spotlight on bad actors and not only those in the traditional sin sectors.

ESG is more nuanced than the original ethical investing, allows for positive engagement with companies that want to change and shines a spotlight on bad actors and not only those in the traditional sin sectors

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Top Tip

There are many ways to embed responsible investing principles into your portfolio and the multi-manager approach described in this piece can be an excellent way to precisely express your beliefs while robustly pursuing your financial goals. Many of the wealth managers on our panel have truly innovative solutions on offer, so complete our short matching questionnaire and we’ll showcase the best the industry has to offer you.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

How does Partners Wealth Management go about discovering clients’ deepest held values and expressing them effectively in portfolios while still robustly pursuing their financial goals?

Richard: That is a big question! We start with a conversation but where that conversation begins depends on the client. If they already have strong views on their sustainable investing criteria and goals, then we can discuss the pros and cons of different approaches to sustainable investing. If like so many people, they are interested but they do not know much about sustainable investing then we often start by dispelling some of the myths surrounding sustainable investment. I will deal with this second larger group first.

Our investors need their invested capital to produce solid returns. Often our clients are worried that investing sustainable will cost more, that the investment returns will be lower and that it may be a fad.  In essence they are asking “what are the risks and costs to me for doing good?”. It is a natural concern as in so much of our lives the “better” thing costs more.

In essence they are asking “what are the risks and costs to me for doing good?”. It is a natural concern as in so much of our lives the “better” thing costs more

One of Partners Wealth Management’s (PWM’s) unique selling points is our investment independence. We do not have a single in-house investment solution instead we have a panel of 16 wealth managers who run our client’s portfolios. They are independently selected, and we monitor their performance. To be on panel we expect them to produce above average risk-adjusted returns net of fees. From this panel we select the managers who also run sustainable portfolios with good ESG. This robust wealth manager selection process helps us to meet our client’s financial goals as well as their sustainable investment objectives. Having addressed client concerns on price and performance we need to understand how they wish to invest sustainably. This is the second advantage to having access more than one investment process.

Wealth managers run money in different ways, each has their own unique investment philosophy and this extends to their sustainable investment portfolios. A wealth manager can only recommend their investment proposition. As we have access to such a broad range of sustainable investment solutions, we can have a very open conversation with our clients to understand their requirements.

As we have access to such a broad range of sustainable investment solutions, we can have a very open conversation with our clients to understand their requirements

What are their sustainable interests? Do they only want to invest in impactful businesses whose core focus is addressing specific issue or are they happy to also invest in more mainstream businesses that are making change? Do they feel strongly about excluding oil majors or would they prefer to back those who are moving to renewables? How comfortable do they feel about investing in, for example into a supermarket who is good to its employees and suppliers, scores highly on recycling but also generates some revenue from alcohol, tobacco and fuel sales?

We could get most of these answers from a client questionnaire, but we will understand our clients better by having a conversation. 

We could get most of these answers from a client questionnaire, but we will understand our clients better by having a conversation

What is your approach to monitoring against mandate and then reporting on the ESG impacts of portfolios?

Richard: PWM has developed a unique client-focused approach to understand how investment managers have constructed their sustainable portfolios. It cuts through industry jargon, reduces the chances of greenwashing and gets to the heart of how a manager delivers their sustainable investment proposition.

PWM has developed a unique client-focused approach to understand how investment managers have constructed their sustainable portfolios. It cuts through industry jargon, reduces the chances of greenwashing and gets to the heart of how a manager delivers their sustainable investment proposition

This proprietary methodology lets us understand each sustainable investment process and then to be able to compare it to its peers. We are then able to choose the appropriate portfolio to meet each client’s sustainable investment requirements.

Each sustainable portfolio has been broken down into four categories with two of those subdivided making six in all. The first category is the percentage weighting to what are known as the “sin sectors”. These are companies that derive income from tobacco, alcohol, gambling, pornography and armaments. We have separated fossil fuels into its own category. The industry sets minimum thresholds for exposure to these sin sectors. We have gone further than this by requesting that all income generated from these sin sectors is included, however small (the supermarket example).

Impact/thematic investments are those that are not only good corporate citizens but whose core purpose is to affect positive change either environmentally or socially

The second category is neutral assets. These are investments that do no harm but are not addressing the world’s sustainability problems. This may include gilts and screened corporate bonds.

The third category is ESG. We classify businesses in the ESG category as good corporate citizens whose core purpose is not linked to sustainability.

Impact/thematic investments are those that are not only good corporate citizens but whose core purpose is to affect positive change either environmentally or socially. This may include renewable energy, some healthcare, social housing and business that are directly addressing climate change. We have subdivided the impact/thematic category singling out businesses that are actively working to address climate change decarbonise and/or reduce greenhouse gas emissions.

Where next for ESG for the industry, and for Partners Wealth Management specifically?

Richard: We are at the beginning of a dramatic shift. More and more people want to make changes to the way they live their lives. Investing some of their assets sustainably is one of the most direct ways to affect positive change and there is substantial evidence to support this.

Multibillion-pound companies will make significant efforts to improve their ESG scores because poor scores will affect their profitability

ESG will be mainstream with a few years but, and this is a big but, if you create a test then people will teach to the test. Multibillion-pound companies will make significant efforts to improve their ESG scores because poor scores will affect their profitability. “Greenwashing” is the name given to companies gaming the system to make themselves look more sustainable than they are. ESG is a game-changer but it is only the first step to selecting your best sustainable portfolio.

We will continue to work with our clients and ask challenging questions of wealth managers. This has been called the “decade of delivery” and PWM intends to be at the forefront of that delivery.

Important information

The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.

We always advise consultation with a professional before making any investment and financial planning decisions.

Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.

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