What is ESG and does Smith & Pinching incorporate it?

Carl Lamb responds:

The term “ethical investing” and its meaning has broadened over the years to become ESG (environmental, social, governance), although the intent is still the same, i.e. people tend to invest in this way if they are concerned about how their money is invested and the impact this has on the planet and on society, not simply the returns they may get.

Years ago, ethical investing generally meant avoiding things like animal testing, alcohol, tobacco, and weapons; nowadays, it is a much more inclusive process, actively seeking out industries and companies that operate in an ethical and sustainable way.  Over time, it has moved from a niche strategy to mainstream.

At Smith & Pinching, we have managed our own range of Ethical Model Portfolios since 2009.  For us, ESG has always been central to our investment process.  We have always looked at negative exclusions (animal testing etc as described above), as well as positive ESG inclusions, such as climate change (E), human rights (S), and equal opportunities (G).

In all, there are 17 criteria against which we measure funds. For this assessment, we use YourEthicalMoney.org. If a fund is not screened by them, we can include it in the Ethical Models if, after meeting with the fund manager, we are satisfied that the criteria are being met. Obviously, this can be a little subjective, so we have introduced further ESG due diligence into this part of the process. If a fund is not on YourEthicalMoney.org, or is on there but does not garner enough ticks in boxes, we now obtain the managers’ views on all 17 criteria before inclusion in the Ethical Model range.

At a recent meeting with a fund manager, we found that they had watered down their ESG process.  They had decided to only require a majority, rather than unanimous decision, on ESG issues to include investments within their fund. Following this meeting, we removed the fund from our Ethical Model range, although we did retain it within our S&P and Low Charge range.  The Ethical Models are not the only range which have ESG considerations, although they are currently the only range with an ESG hurdle for fund inclusion.

We do see many fund managers incorporating ESG into their investment process to some degree.  For example, some will demand a higher return from a company which pollutes a lot, as there is concern about future legislation/taxation which could affect them.  in this way, ESG is factored into decisions, but without screening out ‘bad’ ESG names – they are simply demanding a better return/lower price because of them.

Across all our four Model ranges, we are looking to assess whether all the investment houses we use are UN PRI (Principles for Responsible Investment) signatories. There are six principles:

  • Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
  • Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
  • Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
  • Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
  • Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
  • Principle 6: We will each report on our activities and progress towards implementing the Principles.

As you can see, signatories to this will lead investment houses to integrate ESG across their operations and will bolster the ESG credentials of all our active Model ranges. With regard to the Passive Models, if everyone buys ‘good’ ESG names and sells ‘bad’ ones, then indexes will be full of good companies, but that is not the case yet!