If you think ESG considerations are getting in the way of returns, you’re completely missing the point, argues Richard Butcher

ESG investing

…So said a trustee to me recently while we discussed the ESG rules coming in the New Year. She was fed up to the back teeth with people constantly pushing, or even abusing her, because she invested for returns instead of the planet.

“The problem is this, Richard,” she said, promptly listing three:

“Firstly, what is ethical investment? What you view as a sin stock, some one else may view as a virtuous one. It’s entirely subjective and I can’t please all of the people all of the time or I’d have no investment options left other than putting cash in a box under the bed.

“Secondly, even if I could identify a sin stock, there are two schools of thought on how I should deal with it. Should I disinvest and wash my hands of them but leave them doing harm to the world or should I stay invested, get engaged, accept they aren’t pure as driven snow but use my influence as a shareholder to try and make them better?

 I’d have no investment options left other than putting cash in a box under the bed

“Finally, all of this time, all of this effort and what about the impact on the returns. I’m charged with getting the best possible return, having considered the risk. This ESG stuff is just a distraction.”

I confess I felt a little sorry for her. She’s a lay trustee trying to do a difficult job to the best of her abilities, but I had to take issue with her.

“Yes” I replied “we can stop banging on about ethical investment. Let’s talk about something else instead.”

“You talked about risk and you’re absolutely spot on. Trustees have to consider the risks that exist in the assets they own – by which I mean the ability of the underlying company or companies to continue to generate either or both capital growth and dividends for at least the duration of the trustees’ ownership. Would you agree it would be mad not to?” She did.

“Given we’re long term investors who should have a preference for buy and hold as it’s more efficient than daily trading, would you also agree trustees should consider the long term ability of companies to generate that return?” She nodded.

“Okay. So would you include, amongst the risks you’d consider, how well run the company is, how they treat their workers and whether they are exposed to the risk of future legislation that might limit their current operations and so profits?” Again, she nodded.

The new ESG rules are all about developing filters to identify long term financial risks

“And finally, would you object to writing down your policy for how you consider and mitigate those long term financial risks?”

She scowled a little at the thought of more bureaucracy but didn’t object.

At that point, I finally let her into the secret. The new ESG rules are all about developing filters to identify long term financial risks – albeit in three specific areas; environmental, social and governance – mitigating them and explaining how you do this in the SIP.

“Think of it this way” I concluded “ethical investing is about making the world better. ESG investing is about making returns better. The two aren’t mutually exclusive and ESG may well benefit the world as well, but the focus is purely, simply and entirely on long term financial risk.”

I’d like to be a fly on the wall at her next trustee meeting to see how that discussion might go.

Richard Butcher is an independent trustee and managing director of PTL