How Green Is Your Cash?
- BetterAskAdam.com
- Feb 10, 2024
- 4 min read
The Labour Party has cut its green investment plans by almost half. The party announced it would slash the Green Prosperity Plan from £28bn a year to under £15bn.
Whatever happens with government money, so called 'environmentally friendly' investments have become big news in financial markets. They used to be called ethical funds but now are generally referred to as ESG Funds - standing for Environmental, Social and Governance.
In 2021, a record $649 billion went into ESG funds, an increase of almost 20% from the $542 billion n 2020.[1]
As the evidence mounts about us all facing potentially catastrophic environmental damage, there is a well placed desire to try and make people's savings and investments help direct the world to a more sustainable future. The campaign, Make Your Money Matter, is trying to create a movement "calling for the trillions of pounds invested in our UK pensions to build a better world."
There is certainly plenty of options to invest in ESG funds, and other ethically directed pensions and ISAs.
While the objective of these funds is important, there has been growing concern about whether they do what savers and investors think they do.
You can label a fund ESG - but confirming how green it truely is, turns out to be very difficult. There are ESG rating agencies which are meant to help, but they have their own problems. One of the concerns about the validity of ESG ratings is the disparity between different rating agencies. The Economist claimed that "Whereas the credit-rating arms of Moody’s, S&P Global and others, produce results that are close to 99% correlated, scores produced by them and other firms such as Sustainalytics and MSCI, tally barely more than 50% of the time." [2]
Part of the problem is that the term itself is a bit rubbish. It links 3 things together to create a measure of how 'good' a company is. But the different parts of ESG may be working in opposite directions. So a company which has good Governance, may have a very poor Environmental track record. Averaging one against the other - may not tell us much about how it matches our wish for companies to create less pollution.
To add to the problem, rating companies may give more weight in their index to one measure or another - and that too may not tally with an investors own wish to direct their savings to sources which they believe do good.
Even a measure of what is 'good' is very difficult to quantify. For example, investors may understandably not wish to direct their money to companies which produce products aimed to kill and injure. So that would imply not investing in arms manufacturers. But the same people may feel that it is important and morally responsible to stand up to the current aggression, we have seen from Russia, in its invasion of Ukraine. So is supporting the defence of democracy in an armed conflict, in this case, a moral or an immoral thing to do?
Barclays, Britain's biggest lender to the oil and gas industry, said it will stop direct financing of new oil and gas fields and restrict lending more broadly to energy companies expanding fossil fuel production [3]. A move away from oil is important in reducing pollution. But since we are still an oil based economy, people are still using cars, oil based plastics and gas central heating. If demand remains for oil based products, and the UK can't fund them - then other oil sources may have to be found - relying on dictatorships and authoritarian countries - to supply our oil demand, and thereby supporting authoritarian regimes. So again, a decision over whether a investment is moral or not - is very complex and not easily summarised in the acronym ESG
There is also the question of how ESG funds perform......
Well - I think this is going to be very hard to come to a definitive answer because, at best, we can talk about what happens on average and no one is average. We are all very specific. But some of the evidence on performance is not great.
The Harvard Business Review ran an article reviewing a Journal of Finance paper, in which University of Chicago researchers analysed the Morningstar sustainability ratings of more than 20,000 mutual funds controlling $8 trillion of investor savings. They claimed that none of the high sustainability funds outperformed any of the lowest rated funds.
Perhaps more surprising is a claim that researchers at Columbia University and the LSE who compared the ESG record of U.S. companies in 147 ESG fund portfolios and that of U.S. companies in 2,428 non-ESG portfolios.
Their research suggested that the companies in the ESG portfolios actually had worse compliance record for both labour and environmental rules than those outside the ESG group. [4]
The Big But ....
Despite concerns about what it is and how it performs - putting your money where your morals are - is going to be crucial in putting the world on a more sustainable path. Ensuring your pension, ISA and investments are supporting companies which create beneficial change - could be the most powerful thing we do to help support the environment and our ability to live in it in the future.
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