RockWealth was one of the first financial planning firms to embrace sustainable investing.
It’s sometimes referred as ESG investing, with E standing for environmental, S for social and, and G for governance, as in corporate governance.
We actually prefer to talk about values-based financial advice — in other words, matching clients’ investment portfolios with the personal values they hold dear.
So why do we take it so seriously? How have clients responded? What does the future hold for ESG? And is there a danger that it could become too popular.
RockWealth partner MARK VAIL addresses these and other questions we are frequently asked about sustainable investing in this wide-ranging interview.
The article is sponsored by Global Systematic Investors.Mark, let’s begin with some background. When and why did RockWealth start to take a close interest in ESG?
MV: It’s been on our agenda for a number of years now. There are two main reasons. Firstly, intuitively and morally, it just felt like the right thing to do. We’ve always viewed ourselves as disruptors and truth-seekers, always looking to challenge the status quo.
Secondly, while the popularity of ESG has been increasing over recent decades, I think it has now reached a sort of inflection point. Any lingering reservations we had about ESG investments — about performance, for example, data, analytics, cost and choice — now seem to have largely been resolved.
How have you built ESG into your financial planning process?
I suppose we had a number of alternatives, from offering it as an option on one end of the scale, through to going all-in at the other end of the scale. I think the more we looked at ESG, the more compelling the arguments became.
Pretty early on in that process, we decided that this wasn’t going to be a tick-box option, a nice-to-offer component for our clients’ portfolios. We realised it would be a must-have ingredient in every portfolio. So we’ve gone all-in.
We’ve had to build a suite of new ESG portfolios; and all new clients to the business, over the last 12-to-18 months, have been invested into these ESG portfolios. There is no alternative. We don’t believe there needs to be an alternative, if truth be told.
Have you had any clients say they don’t want to invest sustainably?
No, we haven’t had a single client saying they didn’t want to invest sustainably. The reaction has been overwhelmingly positive.
We spend quite a bit of time getting to know our clients, and understanding their motivations and their values. We also like to articulate a consistent message, so people are clear on our values as a business, and what we stand for. So that has resulted in us attracting similar, like-minded individuals as clients, and explains why, as I say, everyone so far has been happy to invest in evidence-based ESG portfolios.
In fact, interestingly, several of our newest clients have sought us out. They’ve chosen us not just because of our evidence-based approach to investing, but also because we incorporate ESG into that proposition.
There’s been much debate about the wisdom of sustainable investing from a purely financial point of view. Some say it’s good for returns, while others say it could harm returns. Who’s right?
That’s a really interesting question, and I’m not sure there’s an obvious answer. RockWealth’s evidence-based approach to investing does away with trying to guess where markets are heading, so postulating about unknowns is always an uncomfortable activity for us.
I think there are many riskier activities that investors can be engaged in than choosing between mainstream investing and ESG investing. Chasing individual stocks and sectors that are on the up is an example of that.
That said, I do believe that sustainable businesses will emerge even stronger from the current pandemic crisis. You might expect companies with stronger governance, and with better risk management practices and labour standards to outperform. But I think many investors — and this has been borne out in the conversations that we’ve been having with clients over the last year — wrongly believe that incorporating ESG data negatively impacts their portfolio’s performance.
There’ve been many, many studies on this. There was a Morningstar study last year which concluded there’s no evidence that investors need to sacrifice returns when they invest in good ESG companies globally compared with bad ESG stocks.
There are other studies that have identified a positive link between ESG integration and measures of corporate performance factors.
There’s also a well-known meta-study from 2015, which aggregated evidence from more than 2000 empirical studies. 90% of those studies showed a non-negative relationship between the incorporation of ESG factors and corporate financial performance. 63% actually identified a positive link.
ESG funds had a very good 2020. What would you say to those who are warning we might be in bubble territory?
I do think this type of narrative of a bubble looming is not particularly helpful to anyone. But since you’ve asked the question, I don’t believe that’s there’s currently a bubble in the ESG space. That’s partly because the definition of what ESG actually is remains currently pretty flexible and wide, but also because it feels like we really are at the beginnings of a new paradigm.
I think what is interesting, in terms of the effect that ESG investing is having, is that it’s raising the cost of capital for bad companies, and it’s lowering it for good ones. I think to remain relevant and competitive, companies across all sectors will need to wake up to their ESG responsibilities or suffer the likely consequences.
Ultimately, though, who knows if we’re in a bubble situation or not? I think the message that I would want to give is that, if we are in a bubble or a bubble is looming, investors chasing a very narrow investment mandate in an ESG-themed fund may well suffer. However, those embracing ESG factors in a globally diversified, low-cost portfolio for the long-term are likely to experience comparable, if not superior, returns to a non-ESG portfolio.
A diversified approach will serve investors much, much better — whatever the unknowable future throws up. And there will be some periods of really good returns, and periods of really bad returns.
How concerned are you about the amount of “greenwashing” that appears to be going on? And how confident can investors be that they’re actually making a positive difference by investing in ESG funds?
I think greenwashing is a big concern. The regulator now appears to be gearing up for action. It’s developed a set of principles as part of its efforts to address these issues. The move is primarily intended to help fund management firms to interpret the existing rules requiring that their disclosures are fair, clear and not misleading.
Clearly, better disclosures will, in turn, help investors to understand and compare the products that are currently being offered. But no doubt there’ll be plenty more ESG funds to follow. That leaves investors, and for that matter advisers as well, in an extremely difficult position. Without wanting to bash the fund management industry too hard, I think much of what comes out of it has more to do with marketing than, in this particular case, a genuine adherence to the principles of ESG.
So although I am confident that things will improve, it’s extremely difficult for investors with such a huge minefield of products available, and with so many firms making less than clear statements, to know that they are making a positive difference.
As a financial planning firm, what is RockWealth doing (apart from providing ESG investments) to help protect the environment and act in a socially responsible way?
We donate a percentage of our turnover to a regional social impact organisation called Caring for Communities and People (CCP) as part of our commitment to helping support society.
We’ve been assessed against carbon footprint standards and been accredited as a Carbon Neutral Plus organisation for our commitment to more than offset our carbon footprint and to help to leave behind a better environment than we currently enjoy.
We also made commitments long ago to simple things like recycling our waste, buying local from businesses that share our values, and going paperless as far as is practical in our world.
We’re now driving hybrids and fully electric cars if we do need to use a car.
Of course there’s always room for improvement and we’ve got other plans in the pipeline. One of those plans is likely to be B Corporation certification. This is given to for-profit organisations who achieve at least a minimum score against a set of social and environmental standards. Certified businesses are required to give as much consideration to their social and their environmental impact as they do their financial returns.
So it’s definitely a work in progress. We’re doing well, but there’s plenty more still to be done.
There have been several reports lately suggesting that ESG has reached a tipping point, and that it will continue to grow in popularity until it becomes the norm. What’s your view on that?
I think we are possibly at a point of inflection. I suppose the real question is: can we, as a society, grasp this opportunity to address the environment, social and governance challenges ahead? I’m optimistic that the answer to that is Yes.
Last year, clearly, we had significant and negative impacts on all of us because of coronavirus — impacts on the economy, on company profits, and on labour markets around the world.
It just feels to me like the biggest consequences — the health, social and financial struggles that the pandemic has inflicted — are not shared equally.
So I think the E within ESG will continue to dominate, but the S and G attributes are going to be under more scrutiny than ever. Factors such as diversity, contingency planning, working environment, how companies treat their customers and the communities that they operate in — I think those factors are going to become much more important.
I can see these issues, these ESG issues, differentiating companies to a much greater extent than has been the case hitherto. So there are exciting times ahead.
Just look at this migration of investors from active investing to indexing and rules-based factor investment strategies, and the way that trend has significantly reduced costs for all investors. What’s interesting is that assets in active ESG strategies currently dwarf the assets in passive ESG strategies by three or maybe four times. I think it highly probable that, as investors increase their allocations to ESG investments, they will do so through more cost-effective ETFs and index funds.
We could never have imagined a year like 2020, and it’s hard to predict what will happen. But I do think we’re at the start of something fundamental. So I do genuinely believe that ESG will continue to grow in popularity, and become the norm.
I get that the sense that there’s a collective demand for change and I think it all looks positive for the future growth of ESG.
LET’S TALK
Would you like to find out more about sustainable investing and how we can build a portfolio that both reflects your personal values and produces healthy financial returns in the long term?
Then why not get in touch? We’d love to talk to you.
© RockWealth MMXXI
