Claims of engaging with big polluters can only go so far towards appealing to investors, according to Ethical Futures partner Julian Parrot.
Parrott tells ESG Clarity how he sees scope for much more patient capital for ethical clients and calls into question the legitimacy of much of what is now classed as impact investing.
What was the sustainable finance market like when you started in it 20 years ago and how has your approach changed since?
When I started a balanced portfolio was a UK equity fund and an international fund. There wasn’t even a fixed interest investment option. It took until about the early-to-mid-2000s to get more than one corporate bond fund into the marketplace.
We used to be fairly negatively focused in terms of what we were doing and used [research charity] Eiris. It had a lovely spreadsheet that you could punch in all your answers into and get a fund readout of who did what.
We used to predominantly select on that basis, but I became increasingly dissatisfied with that as a way of trying to create a portfolio for clients. So we moved away from that about 2009/10.
And we also changed from trying to be stock pickers as individual advisers because we were creating these random sets of semi-personalised portfolios. We’d worked a lot with Rathbone Greenbank but we started looking around for something that was [more suitable to] service a wider range of clients.
However, since day one we have not done any mainstream advice. Other people can do that – we’re not interested.
How do you see your role in terms of stock selection?
I had the fortune to be consulted by Parmenion when it was in its very early days because it was looking to reboot what it then had as an as an ethical portfolio. Effectively I helped it build, or it helped me build, my decentralised investment process. And then I ended up doing oversight for it.
That’s been really insightful, working with a discretionary manager and understanding how it goes about its due diligence on funds from an investment perspective. And that convinced me that I was more of a planner than an investment manager.
[For clients with less wealth] we do use multi asset funds so we do quite a lot of research around that. We probably do more research than we used to, in fact, because we now do due diligence on discretionary managers looking at the styles and the approaches and all the financials around what they do.
How do you communicate investor engagement to clients?
They don’t really think about the power of the money and I think that’s the most exciting thing – this empowerment of funds.
If you’re going to empower funds, you need managers who have capacity to do so or at least managers who understand where their ability to engage with an investee company is.
[When you explain how managers can effect change through engagement] you do see it in clients’ eyes, you see them going, “Oh, right yeah I hadn’t thought of it like that.”
I explain things to clients in bite-sized chunks and always have a few examples up my sleeve to exemplify things.
There are some more boring bits of engagement [and]… it’s a little bit harder to communicate some of these, such as board diversity.
Where do you see the main incongruities between clients and asset managers?
Probably the biggest area right now is… around banks and fossil fuels.
There are a lot of good arguments that say banks oil the wheels of the economy and… many banks can be fairly benign in terms of what they do. But I think that whole space of extending fossil fuels is an area of tension with what our clients are looking at what they’re expecting from funds.
I don’t think many managers have really picked up on that – there’s still a sort of, “Well, we can engage with them and encourage them to change.” But if you’ve got a big stake in Canadian tar sands or something, it’s a hard one to reverse.
[Also, clients] sometimes come to us with relatively uninvestable aspects. Apart from lending, it’s hard to invest in a social enterprise because social enterprise, by definition, doesn’t give you the ability to take out value.
We… get a bit involved in giving clients guidance on grassroots economy development – working with people like Ethex and Abundance to get to more community-based methods. Fund managers never really do that.
We’ve used Schroeder Big Society Capital Social Impact Trust for some clients. I think that patient capital is an interesting space that would have a lot of traction with clients.
What does greenwashing look like these days?
My biggest concerns are around impact and alignment to United Nations Sustainable Development Goals (SDGs). I see a lot of impact as being old, positive, ethical. Just investing in the water company or renewables company or transportation company or whatever else. I’m not 100% convinced there’s additionality in what’s happening there.
[The SDGs] were designed to encourage private money to create additional funds to support governmental policy. They were not designed to put pretty pictures on standard international global equity funds and go, “Oh look, we are aligned to this.”
I’m [also] concerned about greenwashing that is yet to come, in terms of how for things like disclosures – the data points from data providers – is still not robust enough. It is very much large-cap oriented. So, you’re presenting portfolios on the basis of data for 60% of the marketplace. You’re holding yourself out to a higher standard than is genuinely the case. And [there are] good funds that may be looking at smaller cap, not so well-disclosed businesses but probably are doing something a bit better. I don’t know how you square that circle.
|Preferred DFMs for ethical investing
Tribe Impact Capital
|Example sustainable portfolio
(medium/balanced risk, for medium term
five–15 year, broad-based ethical responsible)
Gilts (inc. index link): 15%
Global/Sovereign bonds: 5%
Corporate bond: 15%
Alternative (infrastructure/property): 10%
UK equity: 22.5%
International equity: 22.5%
Global emerging markets: 7%
|Percentage of assets under advice that are sustainable