ESG is here to stay. Here’s how we’re planning for it

It’s increasingly difficult to ignore that where we put our money has a direct impact on the world around us.

How a firm uses (or abuses) the environment, how it treats its employees, whether it’s managed well, or cuts corners.

These factors are almost as integral to decision-making as whether a company makes good on its financial targets.

I was pleased to have the chance to speak more about this on the Scotsman’s Sustainable Scotland podcast last month. In a useful discussion, we tackled the trend of ESG (environmental, social and governance) investing, the pitfalls and opportunities it presents, and the vital role it will play in the future of investing.

For me, it’s as simple as this. In the future, I believe we won’t talk about sustainable investing. Not because it’s not important, but because it will just be a normal state of affairs.

We can’t change the world with one fund – but it’s a start

Most of us, in our heart of hearts, know that we all need to do better at balancing the claims on the world and its resources, against the claims of future generations. This week the Intergovernmental Panel on Climate Change released a report that warned of the ‘irreversible’ effects of global warming. It’s something we can’t ignore.

Over the last year or two at AAB Wealth, we’ve had many more conversations on this subject with our clients, as we look at ways we can make their investment portfolios more sustainability focused. As part of the ongoing governance, our Investment Policy Committee meets every six months to review our portfolios and the underlying funds we use.

We recently introduced the Dimensional Global Sustainability Core Equity Fund, replacing the Dimensional Global Core Equity Fund, and the Dimensional Global Sustainability Short-Dated Fixed Income Fund, replacing the Dimensional Global Short-Dated Bond Fund.

One thing we’ve been very clear on is that we believe the best way forward is a rational, pragmatic approach. Just as one person can’t save the planet purely by recycling more, you can’t change the world with one investment fund.

But the small steps that we do
take? They can help to make a real difference.

Taking a ‘real world’ approach

So how does it work? In an ideal world, we’d have rigorous, standardised data that give us an accurate reflection of the sustainability for every company we look at. This would then make it a straightforward decision on what makes a sensible investment.

Unfortunately, there’s still a big gap between that perfect vision and reality. There’s mountains of data and information – and jargon – to sift through. We have to be cautious of ‘greenwashing’ (companies that try to gloss over non-environmentally friendly practices) and ‘greenwishing’ (kidding ourselves that a firm’s sustainability efforts can achieve more than is possible).

Our focus is a ‘lighter green’ approach – not an all-or-nothing ‘dark green’.

So, we make pragmatic trade-offs when necessary. That means we can ensure there’s no big increase in risk, performance charges or expectations in your portfolio.

For example, taking a more hard-line ‘dark green’ view, might mean avoiding all energy companies, or airline stocks, as their large carbon footprints mean they have a more severe environmental impact. Our response is more measured. The reality is that these companies are still important parts of their sectors – for now, the industries are too big to ignore completely.

What it comes down to is this, our investment portfolios are based on sound investment principles – they’re evidence based and research backed. Sustainability gives us an added layer of scrutiny that helps us judge whether investments will be successful in the future.

We look for diversified, broad market returns, without higher levels of risk. If that can be achieved in a more sustainable way, then all the better.

“Have you gone woke?!”

Last month we wrote to all our clients to let them how we’re starting to make their portfolios more sustainable.

One of the cheekier responses was “Whatever, swampy!” Another asked, “Are you going woke?!”

It’s fair to say that many of us will have differing views on the role they want ESG to play in their portfolios, but, by and large, most are in favour our rational ‘real world’ approach to sustainable investing. That’s because, more and more, investors are waking up to the idea that ESG isn’t a flash in the pan. It’s here to stay.

Get in touch if you want to find out more about our approach to sustainability.