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Published: September 2019 (10 Min Read)

Talking to clients and to peers around the market about ESG (environmental, social and governance), it is quite clear that people either have different understandings as to what it includes and excludes, or simply don’t know what to think, so I am very grateful to JP Morgan who have addressed the issue head-on, and given some helpful insights. https://am.jpmorgan.com/gb/en/asset-management/gim/adv/webcasts/6347/369399?utm

They suggested that there are effectively five different strategies, which I summarise (with a little of my bias/interpretation) as follows:

  1. Exclusions – does what it says. Likely to exclude arms, gambling, alcohol and tobacco (traditional ethical mandate), but might also exclude for example oil & gas companies or miners because they have a significant carbon footprint.
  2. Positive Tilt – overweight companies which do good and underweight those which are not so clear. Companies in transition, such as Equinor, might be included. https://www.gbim.co.uk/news-insight/saints-and-sinners-in-change-investing/
  3. Best in Class – companies which are clearly trying to make a positive difference in all that they do.
  4. Thematic – selecting one or more themes from the Sustainable Development Goals, and focusing expressly upon them
  5. Impact – specific goals defined by a client seeking particular measurable outcomes.

They said that (2) and (3) are the fastest growing styles.

They also pointed out that the different agencies which assess corporate performance on the various metrics sometimes have different recommendations. Tesla, which always seems to be a “marmite” example, was cited as a company which had caused such a headache. Presumably this is because while it may be an environmental star it is also considered a governance black hole. https://corpgov.law.harvard.edu/2019/08/04/teslas-governance-record-and-esg-monitoring/

Governance has long been considered a fundamental part of how “quality” style fund managers assess companies. Environmental has become a focus in recent times, but many of the social benchmarks remain difficult to appraise and evaluate. Metrics across the board are difficult to identify and then measure. This is probably not a field within which regulators should play.

At GBIM we are trying to be pragmatic by sticking to our philosophy of offering bespoke portfolios to our clients.

We offer a tailored “ethical & responsible portfolio service” based on clients’ preferences. This means that while we can apply a negative screen to provide a “no tobacco” or “no oil” portfolio we can also include investments which aim to have a positive impact. The transition to profit with purpose is already underway in areas such as Agriculture, Diversity and Health to name a few.

It is therefore important to establish at the outset which areas are of most importance to a client by helping them classify their own priorities. GBIM separates portfolio goals into six main themes, derived from the UN sustainable goals: Basic Human Needs; Climate; Decent Work; Healthy Ecosystems; Inclusiveness & Wellbeing; and Resource Security.

We agree with JP Morgan that there are different ways of interpreting clients’ requirements, and we hope that we have found a way to address those requirements in a flexible and responsive way.

Article written by
Simon James