By Mark White, Partner at Boundary Capital
ESG investing is the fastest growing sector within asset management. According to Bloomberg, by 2030 it will represent 30% of global assets. Here we aim to blow away the notion that such investment can only be done at a cost, show how good the UK is in this space and demystify finding the right ESG investment. For this article ESG investing is being taken in its widest sense, which some refer to as Sustainable Responsible Investing.
So, does ESG investing mean sacrificing potential profit compared to traditional funds? Is there a trade-off between worthiness and profit? The answer seems to be an emphatic no. Report after report is coming out with the same conclusion, as per Morgan Stanley’s 2019 Sustainable Reality report: “We found that sustainable funds provided returns in line with comparable traditional funds while reducing downside risk”. So, the common perception or misconception that there has to be a tradeoff between profit and sustainability is proving to be a myth and should not stand in the way of ESG investment.
The next question is about the UK’s standing as a centre of excellence for sustainable investing, or put simply are we any good at it? The great news is, yes, we are very good at it. A report by London & Partners and Dealroom found London to be number two in the World as a hub for venture capital investment into tech solutions that address one or more of the 17 UN Sustainable Development Goals. There are now a number of ‘impact unicorns’ i.e. businesses valued over $1Bn that have a positive impact (climate change being a major impact sector). Examples of these are: Octopus Energy (green energy); Arrival (zero-emission buses and trucks); BritishVolt (responsibly-sourced batteries); Babylon Health (AI health tech, not climate-focused but still impactful in transforming healthcare); and many more in-waiting. The UK has developed a solid framework to help innovating green entrepreneurs access capital.
There has also been misleading media coverage about suggestions of some ESG funds “greenwashing”, an activity described by Wikipedia as “a form of marketing spin in which PR and green marketing are deceptively used to persuade the public that a product, aims and policies are environmentally friendly”. This issue is not helped by the fact that there is no single industry standard or benchmark by which ESG funds need to align. Instead, there is alphabet soup of competing organisations. And so, it feels right to ask how to invest properly or find an ESG fund or investment which does what the investor wants.
Finding the right ESG investment or fund is actually not that difficult as long as some basic steps are followed. The first step is to establish what the investor wants from their ESG investment and why. Is it to avoid ‘sin stocks’ e.g. fossil fuel producers or tobacco companies? Is it to find a fund that engages with investee companies to become better in ESG? Is it because they want their money to be invested in companies working on brilliant solutions that address some of the World’s biggest problems? This can be a long list of questions to establish investors values or a short one to establish motives. Once these are understood they need to be matched with an appropriate ESG investment.
But if we can’t simply trust the name of a fund, how do we know if it is appropriate? To get a good idea of a fund’s ESG credentials it is necessary to look at their strategy and methodology. Funds should always be very transparent with their strategy. For example the strategy at Boundary Capital is: “We only invest in high growth private technology companies that will positively impact millions of lives”. That strategy statement and how it fits with an investor’s motivations should be an investors first filter.
The second filter is the methodology. The issue of greenwashing has really come up where a funds’ methodology allows for a large degree of subjectivity. Investors and advisors need to check the methodologies to ensure a scientific approach to achieving the objectives stated in the strategy. The best methodologies are ones which generate actual values in their process, so allowing different types of investments to be compared on a level playing field. The key point here is to find funds with clear scientific methodologies and avoid ones where subjectivity can creep in.
It feels great to be able to wholeheartedly tell investors that ESG investing is not one that requires them to sacrifice performance. Similarly, we can be proud that the UK is leading the World as global hub of investing in projects that have real impact. And finally, although the World of ESG investing hasn’t yet developed a set of universal global standards, with some basic work to establish an investor’s needs and some analysis of a funds’ strategy and methodology the right investment can be relatively easy to access.