The universal case for responsible investment

(but please, please stop calling it that)

Tom Fieldsend

Investment Consultant

As a lifelong sportsman and sports fan, there are, as you can imagine, many things that frustrate me about sports. I often find myself particularly exasperated by commentators laying praise and hyperbole on players for their work ethic and their desire to win. Last time I checked, that came under the “bare minimum” job description.

I think the problem boils down to definitions; working hard is often seen as separate to the main role of the player, but is always going to make them better at their role because it is an integral part of their role, it shouldn’t be additional.

With this in mind, you can understand why it winds me up when a commentator demands an immediate knighthood and book signing tour for a defender who has sprinted back a whole 15 yards to make a last-ditch tackle. In my opinion we shouldn’t be dramatically overpraising those that do, we should be calling out those that don’t.

Environmental, Social and Governance (ESG) factors are getting a special treatment they don’t deserve, but not in the way you think.

The best ones are always the ones you have to explain...

Steering away from my issues with sports punditry, how does this relate to responsible investment?

The way I see it, the “working hard” is the responsible investment arm of investment. Increasingly, investors are overly and superfluously praised for taking account of very relevant, very real, and very right-now risks in their investment portfolios, just because the risk is considered ESG related. Instead, we should be calling out those who aren’t taking ESG seriously, taking capital away from those who aren’t seeing the whole sustainability picture, and disinvesting from those investing irresponsibly.

Taking ESG back to how it should be defined, it is by design a set of financially material factors. Any good investor should be taking account of all financially material factors, so how did a group of them get spiralled out into their own little boxes for investors to take as much, or as little, interest in as they feel they should (or can)?

We’re all too familiar with investors shying away from ESG considerations because they think ESG is only the “right” thing to do, and therefore believe the considerations will be financially detrimental. Proper explanation and education on ESG show that it belongs in stock analysis just as much as whether the CEO is any good at their job or whether the balance sheet is healthy. Responsible investment and the consideration of ESG factors has been so pigeonholed, so dressed in the emperor’s mouldy old clothes, that much of the investment world has lost sight of why it’s there in the first place.

Let’s take a Dragons Den example. If a fabulously presented pitch on a much needed, cheap to make, quality product ends with “oh by the way, for every item we make, we’ll have to dump a bin bag of waste into Trafalgar Square”, no Dragon is going to be investing (we hope). This lack of investment is probably because dumping the sewage is both ethically and socially problematic. However it could, and would, also be justified with “it makes the city look bad, so we don’t want to fund it”. That being said, if you told them it was an art installation, I bet at least one investor would go for it…

Realistically, once people have been tipped off about the growing Central London rubbish pile:

people will stop wanting a part of it by buying the product, and
public health is going to be in for very large fines, very quickly.

The revenue slump and the fines will cause a fall in the share price and trash your investment, that’s just Econ 101. Presenting this consideration as “we don’t want to fund putting rubbish on the street because people will think it’s bad to look at” is probably correct, but it hides the financial case that so many in the economy (disappointingly) need to see in order to care.

They say it's the way you tell them...

Governance factors seem to be immune from this scepticism though: investors are already taking note of unfair remuneration packages or directors with conflicts of interest; so, why do the social and especially the environmental factors bring such a nervous atmosphere to the room? The positioning of these factors is so key to how the topics are viewed and then considered:

Rethink carbon as the inevitable future tax that will cost the business millions in emissions taxes per year, rather than the latest social media buzzword, and businesses will take action to transition their processes.
Remarket workforce rights and employee benefits as keeping employees happy and productive, keeping reputation intact and share price afloat, rather than an unhelpful expense management could do without, and businesses will take action to protect employee wellbeing.
Reconsider rebuilding nature and achieving net zero as necessary for a world in which businesses exist to continue existing, rather than policy gimmicks fishing for election votes, and businesses will take action to set targets they actually want to follow through on.
Reposition DEI as the factor that drives better performance, thought and output from a team, rather than a “woke” idea being raised at board meetings, and businesses will take action to have genuine diversity in their management structure.
Re-evaluate the price-to-earnings ratio as an indicator of over/under value rather than…. Oh wait, this one already gets taken seriously, doesn’t it? Because it isn’t in the ESG box.

So, what's the punchline?

You can see how easily RI has got lost in the culture wars, rather than being the financial toolbox it was meant to be, but also how easily it can be brought back to bring real investor action that makes a realisable, sustainable, positive difference to investors.

I hope in the future that it doesn’t need its own label and its own little section on the agenda; I hope it is simply commonly accepted as part of a good investment process.

Therefore, my pitch to the investment world is this: stop praising your centre back for wanting to make tackles, it’s what they’re paid to… No wait, hang on… Got myself going again. Deep breaths.

My pitch to the investment world is this: don’t let a label or a potential reaction to a label scare us off from doing what we should be doing. If you want to be a good investor, you have to include all the things that matter, as standard practice. The way I see it, it ultimately boils down to, by definition:

Investing cannot truly be good investing without being responsible.

Find out more...

Hear from LCP's CEO Aaron Punwani in his blog 'Responsible investment: my lightbulb moment'