Cheetahs, cheaters, and sustainability

What is the fastest thing on earth? A cheetah? An airplane? The speed of light? Nope – it’s people becoming ESG specialists!

That’s from a cartoon I saw recently on LinkedIn that amused me, and I’m sure it rings true for many of us. But it also highlights some of scepticism around ESG themes, even as they become a mainstream aspect of asset management.

I’m grateful, then, to work at a group that has been consistently recognised by independent organisations for our commitment to and expertise in responsible investing.[1]

Such a reputation isn’t built overnight; it takes years of engagement and ESG integration, from active to index to real assets. There are no shortcuts or cheats to get there; you can’t just apply a superficial top-down process or stick a label on a strategy.

I think this is particularly relevant as we begin to get to grips with the latest addition to the ESG thesaurus – the Sustainable Finance Disclosure Regulation (SFDR), which came into effect on 10 March 2021. Understandably, in my view, the European Commission issued this new directive to combat ‘greenwashing’.

SFDR requires asset managers to provide standardised disclosures on how ESG criteria are integrated at both an entity and product level, and where their products fall into three distinct categories:

Article 9 funds: those funds which specifically have sustainable goals as their objective

Article 8 funds: those funds that promote ESG characteristics but do not have it as the overarching objective

Article 6 funds: those funds which are not promoted as having ESG factors or objectives

The regulation applies in the EU, so for UK investors it is mainly relevant to offshore funds and ETFs, and the push for greater disclosure and transparency is of course welcome. But equally these designations can’t just become another term that confuses investors.

The whole area of ‘responsible investing’ has long been the subject of intense debate and interpretation. ‘Ethical’ investing, for example, was around long before I joined the industry and ‘ESG’ came to the fore. In my humble opinion, ‘ethical’ approaches were always personal, helping investors to avoid companies and sectors that were contrary to their own individual values.

I remember client meetings in which the ‘shade’ of ethical portfolios was discussed and scrutinised – from dark green for portfolios that absolutely had to comply to the client’s personal values, to lighter green portfolios where there was more leeway.

Sense and sustainability

Today, the conversation is much more about sustainability, as evident in the choice of words in the SFDR. This makes sense to me: we obviously care about making the environment sustainable, but as long-term investors we also seek sustainable systems, sustainable business models, and sustainable growth.

This is why I think a sustainable investment process must include the engagement activities I mentioned earlier. We not only want to identify sustainable growth opportunities, we also want to nurture them through active ownership. Here, I believe a cross-asset-class approach is helpful. Shareholders and bondholders can offer different perspectives on a company, and ask questions to different parts of the corporate structure – and use different levers for influence if necessary – to keep ESG standards high and growth sustainable.

It may not make the investment process as quick as a cheetah, let alone an overnight ESG expert, but in my view it’s the right approach.

[1] In 2020, LGIM was ranked highest among asset managers for our approach to climate change in a review by NGO ShareAction, was ranked top for the second year in a row among the world’s largest asset managers for engagement on climate change by NGO InfluenceMap, and the UN-backed Principles for Responsible Investment (PRI) also selected us as part of its ‘leaders group’ on climate change. In early 2021, Corporate Adviser also found LGIM the highest-ranking asset manager in a meta-study of industry metrics of actions taken by institutional investors on ESG and climate change.