Friday HighlightJun 26 2020

'Doing good’ during Covid-19 is fine, but is it strictly ESG?

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'Doing good’ during Covid-19 is fine, but is it strictly ESG?

Socially-conscious investors may want to reward them but it’s worth digging deeper. 

A simple way to think of it is that ESG and sustainability is in how a company makes its profits, not how it spends them.

Broadly speaking, the tech sector has a big problem around the ethics of cobalt.

A sudden redeployment of time, energy, and resources may be very worthy, but is it a free pass into the good environmental, social and governance club? 

The headlines can hide corporate histories which wouldn’t necessarily stand up to the scrutiny of ESG and sustainable screens or processes. 

Coronavirus has certainly made us all more aware of the ‘S’ in ESG and the social impact of where we, and our choices, fit into our communities, as well as the companies where we decide to put our money.

That’s a good thing and it’s a start. 

But it's far less about a quick pivot to have a ‘good’ crisis from a marketing perspective, and more a longer journey towards improving society and the planet, slogged out under the radar for years.

Walk the walk

Take one of our holdings, Microsoft.

Broadly speaking, the tech sector has a big problem around the ethics of cobalt, a mineral used to build rechargeable lithium-ion batteries integral to the mobile technology in your phone and laptop.

We've been working with our investors and Microsoft to clean up the industry. 

A company that profits from something bad but then spends on charitable donations, I would argue, is not a sustainable company.

Microsoft’s chief executive recognised that while they try to source cobalt from reputable sources, you need to go all the way back to the start of the supply chain where it's mined, mainly in the Democratic Republic of Congo, to work out how to make it sustainable. 

When you engage on a big industry issue, it will take a while.

Even a willing company as large as Microsoft can have limited influence.

It may take a generation to really clean up cobalt, but it could have a huge positive impact because tech isn’t going away. 

Arguably, companies peddling positive impact only since the coronavirus outbreak, can muddy the ESG waters in a way that lowers the bar for positive progress and dialogue on sustainability.

That clothing retailer making masks and gowns, did it pay its suppliers during lockdown?

The industrial company now producing antibac, does it usually make its money supplying the arms industry?

Pin them down

A company that profits from something bad but then spends on charitable donations, I would argue, is not a sustainable company.

It's not running through its DNA. There are, however, some tell-tale signs of genuinely ESG-focused companies.

I always ask the chief executive to explain their company’s sustainability aims.

No wishy-washy waffle. Find out if there is a clear and transparent sustainability framework, such as a commitment about where they will and won't invest.

You don't want any shocks, for example, if in the future an energy company appears in a fund.

Find their DNA. Look for sustainability running through their DNA; a commitment from the top down on how they’ll treat all their stakeholders from staff to suppliers.

Demand receipts. Transparent and ongoing reporting is critical. Demanding, on an ongoing basis, data showing how they are meeting their ESG aims and outlining their decision-making process is vital.

Probe the chief executive

We are signed up to the UN Principles for Responsible Investment, and we spend a lot of time looking behind the numbers at companies that can be very good at manipulating measures such as the UN Sustainable Development Goals. 

These 17 goals are a global blueprint to achieving a better future for all of us.

They address challenges related to poverty, inequality, climate change, environmental degradation, peace and justice. The aim is to achieve them all by 2030. 

I always ask the chief executive to explain their company’s sustainability aims.

It’s the simplest and most effective test I've found.

Often, you’ll see highly polished leaders suddenly look around for help.

Or, they are able to just talk about it freely (remember the bit about DNA?), and that's a really good sign. 

Accountability and independence are paramount.

Soon there'll be more resources to help financial advisers invest sustainably for clients.

Rathbone Greenbank Investments has housed our ethical investment research team for more than 20 years, and I have to send every stock idea to them for the final say.

We have two stages when choosing companies to invest in; a negative screen that knocks out things like oil, gas and armaments; and then we demand a very positive link to sustainability.

Ideas are not plucked out of the air on an emotional basis. 

Part to play

There are different approaches within the sustainable finance industry and different terminology on ESG.

But I think we have to work together as fund managers, financial advisers and investors to implement that positive change.

Arguably, asset managers haven't done enough in the past. That’s starting to change. 

Soon there'll be more resources to help financial advisers invest sustainably for clients.

The EU taxonomy on ESG is due this year, which could instigate big changes. Funds will soon have to report much more on their sustainability aims. 

It's still very early stages, and it’s a long road, and the ‘S’ is now here to stay.

But long-term positive difference can only be driven if we look more closely at the source of company profits, and not where they end up splashed.

David Harrison is fund manager of the Rathbone Global Sustainability Fund