With 50 shades of green, it’s a jungle out there

Whatever else climate change activism may have done, there is today a far greater sensitivity among investors and fund managers to environmental and sustainability issues. It is no longer enough for pension funds and institutional investors to offer a “green” fund for investors sensitive to these issues. It is now increasingly common for fund managements to undertake climate change environmental and corporate governance screening across all the investments they make.

Companies are under increasing pressure for environmental statements in their annual report and accounts. And their managements are frequently subject to forensic questioning over corporate behaviour. Indeed, this has become one of the most outstanding changes in the monitoring and appraisal of quoted companies over the past ten years. The slogan of “maximising shareholder value” is no longer sufficient, assuming it ever was.

This pronounced change in attitudes has been brought about by some spectacular failures of governance in recent years that have cost investors billions and shaken fund managers out of their complacency.

The Exxon Valdez disaster in March 1989 was an early wake-up call. More recently – and altogether more spectacular – was the BP Deepwater Horizon debacle in the Gulf of Mexico which wiped £41.3 billion off the oil giant’s market value and drew a record $20.8 billion fine. After environmental ruinations such as these, investors could no longer shrug environmental concern aside as peripheral issues in company stewardship.

Corporate failure has also worked to bring sustainability concerns to the fore. Many investors thought that large infrastructure companies and those with giant public sector contracts offered defensive attractions compared with the more entrepreneurial approach of other businesses. But that illusion was shattered with the collapse of infrastructure giant Carillion and more recently Interserve, whose stock market value has been all but wiped out.

These failures in stewardship, combined with extensive social media coverage of corporate shortcomings, have radically changed the investment environment and transformed the requirements for company disclosure and accounting. In a growing number of pension funds, companies must satisfy demanding criteria on environmental and social governance (ESG).

Prominent among these are major institutional investors such as Legal & General and Aviva. Both have demonstrated high levels of engagement with firms to ensure good outcomes are reached for companies, shareholders and society at large.

This growing pressure for environmental audit and disclosure has inevitably brought with it all manner of metrics and definitions as to what constitutes acceptable standards of socially responsible behaviour and oversight for governance purposes. Are all fossil fuel companies to be excluded? If so, what is the incentive for oil majors to innovate, improve and lessen adverse environmental impact? If fracking and nuclear are also beyond the pale, how intensive must renewable energy become and what of the environmental intrusion here? How is the use of plastic to be curtailed? What is permissible and unacceptable? What of fines and penalties which end up being passed on to the consumer? What farming processes should and should not be excluded?

Already there are many different variants and standards of what constitutes acceptable green behaviour. This week’s Investors Chronicle devotes six pages to an analysis of the complex hierarchy of ESG issues, from carbon emissions to product carbon footprint, product liability, chemical safety, nutrition, supply chain standards, toxic emissions and packaging material and waste.

So wide ranging are the standards being applied, we are soon in a jungle of green – 50 Shades of Green from which the investor can choose. The article identifies two forms of socially responsible investing (SRI) – one is labelled “light green”, which generally means positive screening for companies that have made progress on issues such as green energy. The “dark green” category involves negative screening, where any company involved in fossil fuels, plastic packaging, tobacco, alcohol or armaments might be excluded.

But such stringent dark green screens, while preferred by more militant investors, would greatly reduce the range of investment opportunities for most. They would also work as a disincentive for errant companies to improve. For example, activist investors have succeeded in getting Exxonmobil to issue public support for the Paris Climate Change Accord. They have also backed a motion for Exxonmobil to publish long-term portfolio impacts of global climate agreements. Royal Dutch Shell has led on issues related to gas flaring, drilling in ecologically sensitive regions, portfolio stress testing and carbon reporting. “The company’s stated commitment to halving the net carbon footprint of its products, “said the IC, “is a reassuring sign of a longer-term focus that acknowledges the ESG risk that the company and the industry faces”.

Welcome though this institutional shareholder activism has been – and arguably achieving more in practical improvement towards a greener future than public virtuesignalling and demands for unrealisable climate change targets – most investors have neither the time nor wherewithal to submit their holdings to such forensic scrutiny. However, there is a growing number of trusts and funds specialising in this area from which to choose. Prominent among them is Impax Environmental Markets. It well illustrates how investors can pursue green objectives without performance sacrifice – the shares have risen by 79 per cent in three years and by 112 per cent over five. Healthy growth, indeed.