ESG grapples with rule-takers vs rule-breakers; A familiar friend for DFM portfolios

Make or break

Baillie Gifford’s Positive Change fund is a fixture in wealth managers' ESG portfolios, and indeed in many conventional of their offerings nowadays, too. But the approach to sustainable investing espoused by some at the company hints at a schism that could soon emerge within the funds industry.

It increasingly looks like asset managers are of one voice when it comes to the philosophical importance of ESG. Investing for the long-term is supposed to be part and parcel of active management, after all.

In practice, approaches differ, yet most agree that investors should be able to compare like with like. That’s the thinking behind rules like Europe’s Sustainable Finance Disclosure Regulation, though the jury it still out on how effective its requirements will prove.

But there’s a sense that some are concerned these rules might prove too successful. If investors start categorising strategies solely via their ESG attributes, they may miss out on diamonds in the rough – particularly if they refuse to look at that rough at all.

Baillie Gifford’s departing James Anderson last week criticised ESG “dogmatists” who now “enjoy such unjustified influence”. His complaint is not just that sustainability metrics fail to capture the effects that the likes of Tesla have on their entire industry – but also that its maverick approach to governance issues is in many way inevitable.

“Aren’t all companies that transcend the mediocre (And even the good) fundamentally unreasonable?” Anderson asks. This is a relatively common venture capitalist argument, an extension of the idea that you have to take risks to succeed. To make it really big, you have to take big risks, and sometimes ignore the rules along the way.

This position is naturally in tension with the do-no-harm ethos of sustainable investing. Balancing a strict set of rules with an interest in radical change is a difficult square to circle for any investment manager – or for those who invest in their funds. And these competing influences will come to the fore more and more often in the months and years ahead.

Dead or alive

Goings-on in the US still have an outsized effect on world markets, and it’s partly for this reason that the consequences of price growth across the Atlantic is being equated to worldwide inflationary concerns.

On one level, that’s perfectly natural. Most economies are or will soon be emerging from the societal changes prompted by the pandemic, and that shift has tended to be inflationary.

The domestic economy, to take the most obvious example, is in the middle of its own inflationary spike – though there are of course other factors at play here, too.

So it’s little surprise that Capital Economics lumps together the US and UK as the two most likely sites of higher price growth.

But the forecaster also predicts the coming months will see inflation remain “extremely low” in a number of other parts of the world. It says price growth remains “dead” in the likes of Europe and Japan.

In the latter case, that remains the consensus view. The former is a little more contested: the European Central Bank isn’t predicted to raise rates for some years, but its inflation projections have come under much closer scrutiny of late.

One area where this divergence could materialise is in currency markets. Capital says exchange rate volatility “is likely to increase”; areas with higher inflation like the UK may suffer as a result.

From allocators’ point of view, however, further weakness in sterling could provide a familiar boon while they grapple with the effect of price pressures on their domestic assets.

Go your own way

Cutting across the above analysis is the possibility that disinflationary pressures stay in place in the UK. Rishi Sunak’s speech at the Conservative party conference today suggests that is a distinct possibility. He remains in containment mode, and is focused on reining in spending in the short-term.

This is one area where the UK is at odds with its counterpart across the Atlantic. The US’s $1.2trn infrastructure plan must still win House of Representatives approval, but stimulus remains the overriding focus of the Biden administration.

There are plenty of respected voices who disagree with Sunak’s thinking on these shores, too. But it may be that the UK once again ploughs its own furrow in the months ahead.