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Commentary Impact Investment

Just what is the point of ESG?

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When I started my career working for an environmental consultancy in the late 1990s one of my first projects was to analyse the world’s entire library of corporate environmental reports. It didn’t take long – only about 100 reports were being produced at the time. Most of these provided a thin veneer of ‘greenwash’, though some, like the Body Shop’s ‘Values Report’, ran to several hundred pages and could only be purchased in hard copy!

Needless to say, things have changed substantially since then.

KPMG’s 2013 analysis of company reporting counted more than 40,000 reports from 41 countries.1  According to the research 91% of the UK’s largest companies produced a corporate responsibility, environmental or sustainability report in 2013. In the US the equivalent figure was 86%, in Japan it was 98% and even in Kazakhstan, 25% of the country’s largest companies produced a corporate responsibility or equivalent report. In some countries, of course, producing such a report is mandated and so coverage is essentially universal among large companies (for example in France, Denmark and South Africa).

ESG Integration: the ‘cause célèbre’ of responsible investing

Back in the 1990s, the investment world was largely ignorant of the still nascent efforts by companies to report on their environmental and social impacts.  ‘ESG’ did not yet exist and in any case, using it in investment would have been impossible with so few companies reporting on these issues, and even fewer providing any useful data.

Today, of course, ethical investing, as defined by negative exclusionary screens has been overtaken by ‘ESG integration’ which has increasingly become the ‘cause célèbre’ for responsible investing. Nowhere is this clearer than in the evolution of the UN Principles for Responsible Investment (UN-PRI) where the ‘Integration of ESG’ is no less than the first of the six core principles.

In fact, after a cursory look at the UN-PRI, you would be forgiven for thinking that ESG integration is now a fully mainstream part of the investment agenda. The UN-PRI now counts its members in the thousands and their assets in the trillions (US$59 trillion at the last count). What’s more, the most recent assessment of signatories indicates that over 50% received either an ‘A’ or an ‘A+’ for the quality of their ESG integration.2

ESG is focused on process, but sustainability is also about product

In the push to establish ESG as a core part of investment decision-making, this seems to suggest strong grounds for optimism, if not outright celebration. Unfortunately, we should be rather less sanguine about these results.

The stated goal of the UN-PRI is to ‘understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision-making and ownership practices’.3 ESG integration is certainly an important tool in understanding ‘the implications of sustainability for investors’. It is core to our own investment philosophy at WHEB Asset Management and helps us, we believe, to identify higher-quality companies that are more likely to outperform peers who are less adept at managing these issues.

The problem is that ESG integration has become short-hand for sustainability as a whole. ESG analysis, as currently practised by much of the market, focuses almost exclusively on internal policies and processes at a company and pays little attention to the environmental or social impact of the product. Ironically, this represents a complete volte-face from the ethical investing forerunners of the UN-PRI who looked at nothing but the product.

This approach leads to the absurd situation where Volkswagen can be considered a leader in sustainability – while its products are rightly demonised for their major negative environmental and health impact. The same should be said for coal, oil and gas companies as well as food and beverage companies whose product portfolios are laden with sugar and salt. Ultimately does it matter that a tobacco company’s cigarettes are fairly-traded or that a coal company has improved its internal energy efficiency? Perhaps – but not much – and demonstrably not more than the impact of their products on the health of people, communities and the environment.

Understanding product impacts

This is particularly true of industries where their main impact is in the use of the product (or indeed service). Between 60% and 98% of the environmental impact of a car is in its use (depending on fuel source and power train technology).4  Volkswagen could literally run its entire operations on renewable energy, but this positive profile would be quickly reversed if its vehicles perform worse than their peers. It is therefore deeply ironic, that while some ESG analysts have stalwartly defended Volkswagen as an ESG leader, the rest of the market rapidly sold off Volkswagen stock because of their concerns over the environmental performance of their vehicles.

Such muddled thinking about what ESG means is leading to poor investment decisions and misleading investors. There are now plenty of asset owners that are conflating ESG with a holistic assessment of a company’s overall sustainability. Products labelled ‘positive impact’ and ‘sustainable’ are populated with companies that have strong relative ESG performance but produce products that are directly responsible for some of the most significant environmental crises. Meanwhile, businesses supplying the solutions are overlooked. Companies providing LED lighting systems, innovative high-efficiency manufacturing equipment and solar power technologies are typically excluded on the basis that they have not published their green procurement policies.

ESG is just one ingredient and is not the full recipe

ESG is now firmly on the agenda for a very significant part of the investment community. This represents extraordinary progress in a relatively short period of time, but it is emphatically not the end of the story.

Ultimately, ESG integration is an important tool in understanding the implications of sustainability for investors, but it is just one of the tools. To paraphrase recent comments from one of WHEB’s advisory committee members5, ‘ESG issues are just some of the ingredients, but understanding the total impact of a company should be the recipe’.

https://assets.kpmg/content/dam/kpmg/pdf/2013/12/corporate-responsibility-reporting-survey-2013.pdf

2  Pilot Assessment Report 2015, WHEB Group

3  https://www.unpri.org/about-us/what-are-the-principles-for-responsible-investment

4  http://www.environment.ucla.edu/media/files/BatteryElectricVehicleLCA2012-rh-ptd.pdf

5  https://www.whebgroup.com/assets/files/uploads/20151023-summary-minutes-final.pdf

Important Notices:
Risks include: the price of shares (“Shares”) in FP WHEB Sustainability Fund (“Fund”) may increase or decrease and you may not get back the amount originally invested, for reasons including adverse market and foreign exchange rate movements. Past performance is not a guide to future returns. The Fund invests in equities and is exposed to price fluctuations in the equity markets, and focuses on investments in mid-sized companies in certain sectors so its performance may not correlate closely with the MSCI World Index (the Fund’s benchmark). For full risks, please see fund prospectus on www.whebgroup.com.
General: This blog, its contents and any related communication (altogether, the “Blog”) is issued by WHEB Asset Management LLP (“WHEB Asset Management”). It is intended for information purposes only and does not constitute or form part of any offer or invitation to buy or sell any security including any shares in the FP WHEB Sustainability Fund, including in the United States. It should not be relied upon to make an investment decision in relation to Shares in the FP WHEB Sustainability Fund or otherwise; any such investment decision should be made only on the basis of the Fund scheme documents and appropriate professional advice. This Blog does not constitute advice of any kind, investment research or a research recommendation, is in summary form and is subject to change without notice. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming shares. WHEB Asset Management has exercised reasonable care in preparing this Blog including using reliable sources, however, makes no representation or warranty relating to its accuracy, reliability or completeness or whether any future event may or may not occur. This Blog is only made available to recipients who may lawfully receive it in accordance with applicable laws, regulations and rules and binding guidance of regulators. WHEB Asset Management LLP is registered in England and Wales with number OC 341489 and has its registered office at 7 Cavendish Square, London, W1G 0PE. WHEB Asset Management LLP is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 496413. FundRock Partners Limited (formerly Fund Partners Limited) is the Authorised Corporate Director of the Fund and is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 469278 and has its registered office at 8-9 Lovat Lane, London EC3R 8DW. The state of the origin of the Fund is England and Wales. The Representative in Switzerland is ACOLIN Fund Services AG, Affolternstrasse 56, CH-8050 Zurich, whilst the Paying Agent is Bank Vontobel Ltd, Gotthardstrasse 43, CH-8022 Zurich. The relevant documents such as the prospectus, the key investor information document (KIIDs), the Articles of Association as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland.
The MSCI information may only be used for your internal use, may not be reproduced or re-dissseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages (www.msci.com)

Important Notices:
Risks include: the price of shares (“Shares”) in FP WHEB Sustainability Impact Fund, WHEB Sustainable Impact Fund or WHEB Environmental Impact Fund may increase or decrease and you may not get back the amount originally invested, for reasons including adverse market and foreign exchange rate movements. Past performance does not predict future returns. The Fund invests in equities and is exposed to price fluctuations in the equity markets, and focuses on investments in mid-sized companies in certain sectors so its performance may not correlate closely with the MSCI World Index (the benchmark). For full risks, please see fund prospectus on www.whebgroup.com

 

General: This information, its contents and any related communication (altogether, the “Information”) is issued by WHEB Asset Management LLP (“WHEB Asset Management”). It is intended for information purposes only and does not constitute or form part of any offer or invitation to buy or sell any security including any shares in the FP WHEB Sustainability Impact Fund or WHEB Sustainable Impact Fund, including in the United States. It should not be relied upon to make an investment decision in relation to Shares in the FP WHEB Sustainability Impact Fund or WHEB Sustainable Impact Fund or otherwise; any such investment decision should be made only on the basis of the Fund scheme documents and appropriate professional advice. This Information does not constitute advice of any kind, investment research or a research recommendation, is in summary form and is subject to change without notice. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming shares. WHEB Asset Management has exercised reasonable care in preparing this Information including using reliable sources, however, makes no representation or warranty relating to its accuracy, reliability or completeness or whether any future event may or may not occur. This Information is only made available to recipients who may lawfully receive it in accordance with applicable laws, regulations and rules and binding guidance of regulators. WHEB Asset Management LLP is registered in England and Wales with number OC 341489 and has its registered office at 7 Cavendish Square, London, W1G 0PE. WHEB Asset Management LLP is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 496413.

 

FP WHEB Sustainability Impact Fund

FundRock Partners Limited (formerly Fund Partners Limited) is the Authorised Corporate Director of the Fund and is authorised and regulated by the Financial Conduct Authority with Firm Reference Number 469278 and has its registered office at 6th Floor Bastion House, 140 London Wall, London, EC2Y 5DN. The state of the origin of the Fund is England and Wales. The Representative in Switzerland is ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich, whilst the Paying Agent is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, 8024 Zurich . The relevant documents such as the prospectus, the key investor information document (KIIDs), the Articles of Association as well as the annual and semi-annual reports may be obtained free of charge from the Representative in Switzerland.

 

WHEB Sustainable Impact Fund

The Manager of the Fund is FundRock Management Company S.A., authorised and regulated by the Luxembourg regulator to act as UCITS management company and has its registered office at 33, rue de Gasperich, L-5826 Hesperange, Grand-Duchy of Luxembourg. The Representative in Switzerland is ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich, whilst the Paying Agent is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, 8024 Zurich. The relevant documents such as the prospectus, the key investor information document (KIIDs), the Articles of Association as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland. The state of the origin of the Fund is Ireland. The Fund is registered for distribution to professional investors in Austria, France, Germany, Italy, Luxembourg, Norway, Singapore, Sweden and the United Kingdom, and is registered for offering to retail investors in Switzerland, Denmark and the Netherlands. The Fund is also available for professional investors in Belgium and Hong Kong. It is not available to investors domiciled in the United States.

 

WHEB Environmental Impact Fund

The Manager of the Fund is FundRock Management Company S.A., authorised and regulated by the Luxembourg regulator to act as UCITS management company and has its registered office at 33, rue de Gasperich, L-5826 Hesperange, Grand-Duchy of Luxembourg. The Fund is registered for distribution to professional investors in the United Kingdom. It is not available to investors domiciled in the United States.

 

The MSCI information may only be used for your internal use, may not be reproduced or re-dissseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages (www.msci.com).

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