During 2020 one of the hot topics in financial services has been discussions surrounding the EU Disclosure Regulation on sustainability-related disclosures in the financial services sector, which was due to come into force on March 10th, 2021. Although the UK financial regulator, FCA, have confirmed this will now not be compulsory from March 2021 this genie is most definitely out of the bottle.
I have to admit as the founder of a small outsourcing firm working in the financial services industry I was very cynical about the legislation and the newly coined term ESG that now surrounds this issue. ESG, covers the environmental, social and governance issues that companies should consider when running their businesses. My initial response was this was another investment industry manufactured fad. Six months later I am about to commence the project of building our own ESG policy.
Yes we are a micro company with less than 10 employees, but I am minded of the book by the teenage environmental campaigner Greta Thunberg – No One Is Too Small to Make a Difference. Even if we simply set out to do no harm to our employees and the planet we will be making a small difference. Although I have ambitions to do much more than that.
I think any company, regardless of size, could (and should) pull together an ESG statement and incorporate this into their core values. In fact every firm in financial services should look to do this ASAP as surely this is just an extension of TCF (treating customers fairly) anyway? The hard part for some will be following through and they will be rooted out by their actions not by FCA policing and regulations.
ESG should not be about screening out certain companies and sectors it should be about only investing in well ran companies that take their employer and corporate responsibilities not to damage our planet seriously. It is not just about screening out companies with high emissions, airlines, airports and oil companies are still vital parts of our economy. It is about screening out companies who cynically do harm to our population and planet.
Look at B&M, Boohoo, Sports Direct and Arcadia, all different examples of business owners initially putting their needs first. These companies, not well run airports and oil companies(that we need), should not be included in ESG portfolios. This will then force all companies to take their responsibilities seriously. We still need airports and petrol, yes they might be huge sources of emissions but many of us still like to fly. So instead of beating them up for something they cannot avoid let us reward then for at least being well run until alternatives can be found.
If avoiding oil is desired by an investor then build an individual SRI (sustainable responsible investments) portfolio outside of this. SRI is bespoke to individuals, ESG is doing the right thing as a company when nobody is looking, regardless of sector.
I agree with the many arguments thrust back at ESG investing, including for example Boohoo being an initial ESG darling before the news of their Leicester sweat shops broke; and the poor correlation between the various ESG screening tools. Looking at Boohoo share price and the institutional investors who dumped their shares I suspect they now deeply regret their initial cynical approach.
Also a few future bad apples found lurking in an ESG funds in the future, maybe due to poor screening methods, does not reflect on the fund it reflects on the ‘bad apple’ companies. Picking investments that are at least attempting to screen for ESG at this stage is still a good first step. Waiting for this screening to become perfect will simply delay the adoption of the core values by the shady parts of our economy.