Just the existence of a mega-cap business in their portfolio is a greenwashing alarm bell for some clients, says Ethical Futures partner Julian Parrott, and climate crisis has rocketed up clients’ concern list in the last five years.
In part 2 of his interview with ESG Clarity, Parrott explains how as a “moral arbiter” he works to keep all his clients happy, and how things are not always as they seem when it comes to greenwashing.
What does ESG and sustainable investing mean for your clients and firm?
We only work with clients who wish to invest and manage money with a focus on values-based investment, and would turn away a client who wanted investments in a conventional portfolio.
That said, we are now moral arbiters – we help guide clients through the maze of choices and come to a decision as to what their “type of ethical” is.
We work with a range of discretionary managers that have services to fit a range of client types and aspirations.
What areas of sustainable investing are your clients most interested in?
Climate has risen to the fore in the past five years and renewables are a key interest. However, issues of social justice, labour standards and avoidance of arms etc remain key issues to many clients.
Of increasing importance are governance issues around executive pay, company tax policy, as well and investing for positive good.
Do you discuss feelings of crisis overwhelm with clients?
We write a regular monthly newsletter and share genuine concerns of issues besetting the global community.
We addressed concerns of the Perma crisis in a recent newsletter. Clients, however, are sanguine and tend to count their blessings acknowledging that the impact of this on their investments is a first-world (and selected few, come to that) issue.
What’s a red flag for greenwashing?
Greenwashing is in the eye of the beholder. Of course there are funds that try it on, but it often arises because retail clients rarely fully understand the ethos or investment process of a fund.
Even issues around negative screening are beset by nuance and issues around thresholds. For some clients, just the existence of a mega-cap business is an alarm bell. GSK is perhaps the most common marmite stock.
We look at fund ethos, structure, research process and analysis. We expect stocks to reflect that but we have the time to do the due diligence.
The knee-jerk reactions from clients will usually be around fossil fuels (quite rare to find them in funds we use these days), big pharma and banks.
I don’t hold out a lot of hope that the Financial Conduct Authority’s sustainability disclosure rules (SDR) will resolve this issue, though it’s good it is waking up to the importance of the sector.
What does a typical portfolio look like?
Asset allocated to address risk, with funds with strong exclusionary criteria (still of importance to our clients) but also funds that have clear positive investment rationale (not necessarily impact) and pursue active engagement strategies as well.
We polled clients on gilts and property a few years ago and consensus was that this was acceptable to mitigate risk.
I wish I had had foresight about Trussenomics regarding the gilt positions! Due to liquidity issues, we use less property and, quite understandably, clients are happy to have renewables-based infrastructure as a proxy for it.
What’s the secret to getting sustainability-led returns?
There isn’t one! It’s not that difficult – established funds with clear investment ethos and research process, managers who are committed and a dedicated in-house research/SRI/governance resource, asset allocation, long-term view, and patience.
Read part 1 of ESG Clarity’s interview with Ethical Futures’ Julian Parrott here.