Seeds of change taking ethical investing from niche to mainstream

Saving the planet and making big business more accountable are two of the greatest challenges of our lifetime, which explains why ESG – environmental, social and governance – investing is always at the centre of controversy. 

The latest row, this time at Chartwell, a division of catering group Compass, highlights the more assertive mood among those who seek good returns, but also want companies to deliver on ethical and sustainability pledges. 

Greenwashing, where conduct is at variance with claims, will not be tolerated by this group, whose heroes are the canny investor Warren Buffett, but also the caring environmentalist Sir David Attenborough. 

 The shockingly meagre free school meals supplied to disadvantaged pupils by Chartwell brought censure from the campaigner and footballer Marcus Rashford, and also from Boris Johnson. 

Now Compass, which has traded on its ESG credentials, faces questions over its strategy from fund managers that hold its shares, including M&G and Legal & General Investment Management. 

This episode follows the disclosure that Aberdeen Standard ethical funds had stakes (now sold) in fast-fashion company Boohoo whose links with Leicester sweatshops remain contentious. 

If, inspired by Attenborough, or Greta Thunberg, you were planning to commit some cash to ESG this year, you may now have second thoughts. 

It may seem futile to try to ensure your savings do not go into alcohol, arms or tobacco, or any other activity contrary to your principles, if ESG funds continue to invest in companies with dubious business morals. But here is why you should proceed. 

Against the background of next week’s key Climate Adaptation Summit in which world leaders will take part, the muscle of ethical managers is expanding, making it more awkward for companies to ignore their views. 

Thanks to a surge of inflows in 2020, €1 trillion is now sitting in these funds throughout Europe. A survey this week from Blackrock, the US giant, reveals that investors plan to double their ESG assets by 2025. ___

Blackrock says this tectonic shift taking ESG from the niche into the mainstream will partly be spurred by political pressure. Governments, caught off-guard by the pandemic, want to be more prepared for another emergency. 

The UK has pledged that it will be ‘carbon neutral’ by 2050 (the carbon dioxide emitted by cars, industry and homes will be ‘net zero’; for every tonne produced, a tonne must be extracted from the atmosphere). 

This clean energy drive, together with the Biden administration’s $2trillion of eco-policies, adds to the argument that it is more hardheaded than idealistic to put money into ethical funds. 

Impax’s Environmental Markets Trust holds shares such as EDP Renováveis (EDPR), a Spanish-based renewables company whose shares have soared 118 per cent over the past 12 months. 

Pressure: Environmentalist Sir David Attenborough

You could put together a portfolio of stocks, like EDPR and NextEra, the clean power producer, that aligns with your ethics, relying on data from bodies like the Task Force on Climate-Related Financial Disclosures. 

A major company’s sustainability statement should tell you which of the UN’s 17 sustainable development goals it supports. 

But this process requires devotion, and an assessment of your priorities. Does the wish to avoid fossil fuels mean the exclusion of Shell, which is striving to be a net-zero emissions business? Electric cars are the future, but the disposal of their dead batteries represents a problem. Such dilemmas suggest it’s easier to leave the hard work to a fund manager. Darius McDermott of Fund Calibre likes the Impax trust, the Ninety One Global Environment Fund and the Liontrust Sustainable Future Global Growth Fund (of which I am a holder). 

The high-risk options include Baillie Gifford Positive Change and Fundsmith Sustainable Equity. I am also an investor in this fund which, like its competitors, emphasises its commitment to ‘shareholder engagement’. 

Like other investors, bemused by the Compass and Boohoo scandals, I would like to see all managers exercise this duty more assertively whether over the treatment of suppliers and workers, or boardroom diversity. That is, after all, what we are paying them for.

This post first appeared on Dailymail.co.uk