Last week we were musing about the start of spring. Whilst we were primarily pondering the progression of the snowdrops, croci and camelliae, the markets have developed a thing about springs that go boing. There are so many springs allegedly about to uncoil that we can be forgiven for thinking Zebedee and his whole family have come for tea.
The chief protagonist of the boing theory is Andy Haldane, the estimable Chief Economist of the Bank of England. Far be it from us to criticise anyone of Mr Haldane’s standing, but his grasp of the basics of physics is lamentable, and his lapse into tautology is woeful. His insistence is that the UK economy is poised ‘like a coiled spring’. A spring, of course, is necessarily coiled. Were it not, it would be a ‘wire’. But he is forgiven, and the issue of how much we are all going on the mother of all spending sprees once Boris lets us is crucial. So is our ability and willingness to keep doing so once the initial adrenalin rush of freedom has worn off.
Our focus this week though is not on tautology, but on contradiction. Specifically, we wanted to walk through the conundrum posed by passive ESG investment. There is no doubt low cost ESG funds will be terribly popular. What could be more appealing at the moment? What could possibly be wrong with a fund that ticks both the ‘low cost’ and the ‘ESG’ boxes?
Therein lies the truth. Box ticked, job done, move on. Never mind that the entire concept of passive ESG investment has more holes in it than a teenager’s jeans. So let me be hopefully provocative here. Passive ESG funds should only be bought for clients who do not believe in ESG. They have a role for someone who dispassionately believes that a good ESG score, from whichever agency provides it, will lead to outperformance. Let us not forget there is very little, in practice nothing, stopping a ‘sin’ stock from having a high ESG score. Oil companies, tobacco companies, gamblers, boozers, polluters, plastic manufacturers can all score well; all that is needed is a string of statements and policies in the depths of the website. Honestly.
It is also self-fulfilling. The more popular passive ESG investing is, the more money flows into companies that say ‘sorry about all the pollution, just look at our equal opportunities employment policy’. ESG, in its widest sense, is a means to have better understanding of what clients really want from their investments, and to evolve this into better solutions. If someone really cares about climate change and the role of fossil fuels, how can their portfolio include investments into oil companies? Can anyone really use the counterargument, which would be ‘oil is a lower weight in this ESG index and anyway it’s a very cheap fund’? Surely it cannot be right? As I say, if there is a role for passive ESG investment, it is for those who consciously disagree with ESG, but believe that it might drive higher financial returns. In fact, for an off-the-shelf low cost solution for a client who has no ESG preference, I would actually encourage a passive ESG product as being a better solution than a broad market tracker.
There is deep fault with the funds industry, which dishes up far too much product that is not fit for purpose. In the meantime, thankfully the same funds industry has also developed a more than healthy number of wonderfully managed active funds. Yes, the annual charge for owning the fund is a little more, but arguably nowhere more is it true that you get what you pay for. Surely a handful of basis points on the charges is worthwhile for a fund that delivers properly researched and skilfully picked companies that actually accord with what clients say about their investment preferences?
So this is the great irony. If you must, then please do use passive ESG funds. Just not for clients who care about ESG.
Finally, well done to those who knew last week’s Wacky Races teaser and that Muttley was the answer we were looking for. Today, we stay with cartoons: with a voice-over by John Le Mesurier, which nephew of Aunt Flo was friends with the imaginatively named PC Copper and Farmer Barleymow?
Jim Wood-Smith – CIO Private Clients & Head of Research
HA804/291
All charts and data sourced from FactSet
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