ESG fund managers seek to address these issues through active management, negative screening and collaboration with companies as shareholders.
The ESG acronym stands for Environmental, Social and Governance. While most casual observers may be under the impression that the phenomenon of ESG is very recent in the world of investing, the fact is that it has been around in one form or another for more than 50 years.
However, back then investment thinking was dominated by the philosophy of economists such as Milton Friedman who argued that ‘ companies’ only social responsibility is to maximise shareholder value’ i.e. to simply focus on enhancing value for holders of the
stock and to discount everything else.
While this thinking did dominate there was a small but growing segment of the investment market who were focused on Socially Responsible Investing (SRI) and their thinking was influenced at the time by a number of issues including the nuclear arms race, tobacco and the apartheid regime in South Africa.
Shifting to the mainstream
The world of ESG has come along way in the past thirty years and is now arguably part of the investment mainstream as opposed to being a peripheral investment theme. More and more, the markets expect companies to demonstrate their ESG credentials and show where they stand in relation to the key ESG issues.
As measurement and analytics become more sophisticated and in-depth, ESG Indices are also becoming more accurate and more accepted by the investment community. Following on from this, institutions are already ascribing ESG scores to all companies they analyse based on a number of key criteria.
Government and Institutional Support
While Governments have given tacit support to these issues for quite some time, particularly with regard to climate and the environment, the degree of serious commitment has clearly picked up over the past eighteen months. Christine Lagarde, the Head of the ECB, has put climate considerations at the heart of any future support plans for markets and economies.
In addition, European financial regulators have built ESG factors into their assessment and regulation of banks and other financial institutions. Even in emerging markets, Governments are beginning to recognise the importance of these issues and are giving increasing support to ESG programmes, both financial and regulatory.
As awareness about climate change and a whole range of social issues has grown in recent years, there is demand from the general population that the companies they invest in via their pension funds or savings products measure up in ESG terms.
In fact, repeated surveys have shown that the majority of millennials would be willing to sacrifice some return on their investments in exchange for an ESG investment focus. However, as the chart shows (Harvest ESG Strategy vs. a standard multi asset portfolio index) ESG has tended to outperform rather than lag.
The above chart is supported by research from MSCI and others which shows that in fact financial returns need not be sacrificed in favour of ethical investment and that ESG investment enhances returns in the long run. This is clearly illustrated in the charts above and below.
The Harvest ESG Strategy comprises four liquid funds, two equity based funds, one ethical bond fund and a specialised solar energy investment trust. The overall strategy therefore offers a broad asset mix.
There is a reasonably strong equities focus as might be expected but the addition of a bond and a solar fund bring elements of lower volatility and income respectively to the strategy. All four components deliver strong sustainability characteristics.
Commentary on Recent Performance
Despite the volatility in bond and equity markets in recent weeks, the Harvest ESG Strategy delivered another positive quarter in Q3. Year to date the strategy is up by more than 12%, comfortably ahead of its benchmark. Three of the four component funds were either flat or up over the period while the Rathbones Ethical Bond Fund fell by around 1%.
Overall our expectation is for slower growth overall in the second half of the year and possibly a little more volatility in equities generally. However, ESG as a theme should continue to deliver as an outperformer. (October 2021)
|As a company, we consider ESG funds critical to allow us to construct portfolios that satisfy our clients’ principles as well as their financial needs. It is our view that over time, this ESG strategy can generate long-term competitive financial returns and mitigate downside risk, as well as having a positive impact on society.|
Other Strategies from Harvest include:
Warning: The figures refer to the past. Past performance is not a reliable indicator of future results.The return may increase or decrease as a result of currency fluctuations
Warning: If you invest in this product you may lose some or all of the money you invest. The return may increase or decrease as a result of currency fluctuations. Income may fluctuate in accordance with market conditions and taxation arrangements. Changes in exchange rates may have an adverse effect on the value price or income of the product.