Greener look at investment
ESG is here to stay, and Ian Campbell has a vision of how investors can factor it in when building their portfolios
It’s increasingly difficult to ignore that where we put our money has a direct impact on the world around us. How a firm uses – or abuses – the environment, how it treats its employees, whether it’s managed well, or cuts corners. These factors are almost as integral to decision making as whether a company makes good on its financial targets.
I was pleased to have the chance to speak more about this on The Scotsman’s Sustainable Scotland podcast last month. In a useful discussion, we tackled the trend of ESG (environmental, social and governance) investing, the pitfalls and opportunities it presents, and the vital role it will play in the future of investing.
For me, it’s as simple as this: in the future, I believe we won’t talk about “sustainable” investing. Not because it’s not important, but because it will just be a normal state of affairs.
WE CAN’T CHANGE THE WORLD WITH ONE FUND – BUT IT’S A START
Most of us, in our heart of hearts, know that we all need to do better at balancing the claims on the world and its resources against the interests of future generations.
In February, the Intergovernmental Panel on Climate Change released a report that warned of the “irreversible” effects of global warming. It’s something we can’t ignore.
Over the last year or two at AAB Wealth, we’ve had many more conversations on this subject with our clients, as we look at how we can make their investment portfolios more sustainability focused.
As part of the ongoing governance, our Investment Policy Committee meets every six months to review our portfolios and the underlying funds we use.
AAB Wealth recently introduced the Dimensional Global Sustainability Core Equity Fund, replacing the Dimensional Global Core Equity Fund, and the Dimensional Global Sustainability Short-dated Fixed Income Fund, replacing the Dimensional Global Short-dated Bond Fund.
One thing we’ve been very clear about is that we believe the best way forward is a rational, pragmatic approach. Just as one person can’t save the planet purely by recycling more, you can’t change the world with one investment fund.
But the small steps that we take? They can help to make a real difference.
TAKING A “REAL WORLD” APPROACH
So how does it work? In an ideal world, we’d have rigorous, standardised data to give us an accurate reflection of the sustainability for every company we consider. This would then make it a straightforward decision on what makes a sensible investment.
Unfortunately, there’s still a big gap between that perfect vision and reality. There’s mountains of data and information – not to mention jargon – to sift through.
We have to be cautious of “greenwashing” (companies that try to gloss over non-environmentally friendly practices), and “greenwishing” (kidding ourselves that a firm’s sustainability efforts can achieve more than is possible).
The AAB Wealth focus is on a “lighter green” investment approach – not an all-or-nothing “dark green”. So, we make pragmatic trade-offs when necessary. This means we can ensure there’s no big increase in risk, performance charges or expectations in your portfolio.
For example, taking a more hard-line “dark green” view might mean avoiding all energy companies or airline stocks, as their large carbon footprints mean they have a more severe environmental impact.
Our response is more measured. The reality is that these companies are still important parts of their sectors and, for now, these industries are too big to ignore completely.
What it comes down to is that our investment portfolios are based on sound investment principles – they’re evidence based and research backed.
Sustainability gives us an added layer of scrutiny that helps us judge whether investments will be successful in the future. We look for diversified, broad market returns, without higher levels of risk. If that can be achieved in a more sustainable way, then all the better.
HAVE YOU GONE WOKE?!
Last month, AAB Wealth wrote to all our clients to let them how we’re starting to make their portfolios more sustainable. One of the responses was: “Are you going woke?!”
It’s fair to say that many of us will have differing views on the role they want ESG to play in their portfolios, but, by and large, most are in favour our rational “real world” approach to sustainable investing. That’s because, more and more, investors are waking up to the idea that ESG isn’t a flash in the pan – it’s here to stay.
If you would like to find out more about our approach to sustainability, please get in touch.
Ian Campbell is a director and chartered financial planner at AAB Wealth
In the future, we won’t talk about “sustainable” investing. Not because it’s not important, but because it will just be a normal state of affairs