Turning the Tide: how investors could create a better future
Capitalism is under a lot of pressure. Long gone are the post-war years where it seemed everyone was always going to be happier, healthier and freer than the generation before. After decades of kicking the can down the road, the world is waking up to a whole host of existential issues with the status quo.
The August Intergovernmental Panel on Climate Change (IPCC) report grabbed headlines. It illustrated in glaring detail that irreversible changes to our climate are already happening. These may become far worse if serious action is not made soon. Rising inequality, worker exploitation and technological unemployment are just a few more trends that we are realising are consequences of how our systems currently operate.
Despite these issues, capitalism is undisputedly the most effective system the world has found for eradicating poverty and increasing prosperity, at least so far. It would seem what the world needs is to improve upon what we already have. We need a system which continues to increase standards of living across the globe, without such serious trade-offs.
Over the last ten years, the world of investing has been taking important steps towards a future where this could be possible. Many investment funds are integrating environmental, social and governance (ESG) considerations into their objectives. Many are are now engaging directly with businesses to pursue objectives other than short term profits. Despite scepticism of these new forms of investing, some recent events illustrate how this stakeholder engagement could shape a better world.
The little engine that could
In the last week of May, a little-known hedge fund called Engine 1 made a significant impact on the world stage. Despite owning just 0.02% of oil giant ExxonMobil, Engine 1’s nominations took three of the twelve seats on the company’s board of directors. It did this by co-opting the world’s two biggest fund managers, Blackrock and Vanguard, among others, to vote in favour of a motion to move away from oil in favour of “more sustainable value creation.”
This motion passing is a testament to the changes we have seen over the last decade in how institutional investors view the risks of continuing unsustainable practices by companies like ExxonMobil. Many of the largest fund managers, Blackrock and Vanguard included, have committed to including environmental, social and governance considerations in a growing number of assets that they hold. In the same week, shareholders of rival oil giant Chevron rebelled against the board. This was to favour a proposal from a Dutch activist group to cut its carbon emissions.
These events are likely to be the first of many. Throughout 2020 $288 billion was invested globally in sustainable assets, a 96% increase over the whole of 2019. Sustainable and ESG investing is not just about buying companies that are doing well in terms of their emissions or how they treat their workers. It is also about engaging with companies directly. Representatives of ESG funds use their position as shareholders to work with or put pressure on companies to become better for people and planet. What Engine 1 has achieved is one of the best examples so far of how much of a difference this engagement can actually make.
Capitalism that cares?
Sceptics argue that many ESG investors are less bothered about climate change and other social issues. They argue they are simply trying to maximise returns over longer timeframes. Engine 1 themselves claim not to pursue positive impact in its own right. Instead, they believe it will reflect positively on performance. It is true that a more sustainable model for ExxonMobil may be more profitable in the longer term. Oil prices are not what they once were. Exxon’s share price has consequently declined by over a third since its peak in 2014. The company lost $25bn in revenues in the last year alone.
Environmental considerations purely for profit are certainly better than none at all. Whether this would be enough to keep the world on track for its global warming targets will depend on how profits are related to environmental damage.
For now, the idea that shareholder and stakeholder interests could be aligned is popular. It is certainly a compelling concept, but whether it is true is yet to be revealed. If the data were to cast doubt on the idea, many investors may quickly switch back to their old ways. Both governments, with top-down interventions, and consumers, with bottom-up decisions like switching to more sustainable or ethically produced products, can affect this. However, both are working with limited budgets, time and information to make decisions with. Fortunately, ESG and sustainable funds also engage with firms to increase their transparency around their environmental impact, so at least the latter is improving.
What provides some hope is that two weeks after the upset at Exxon 457 institutional investors, holding a third of the world’s assets under management, made a groundbreaking move. Ahead of the recent G7 meeting, they called for governments to end their support for fossil fuel companies. This demonstrates that a growing proportion of investors are becoming interested in environmental action for reasons other than financial.
An opportunity
It would fair to question whether ESG and sustainable investing are of the purest intentions. This certainly varies from fund to fund. It would also be fair to question those who hail the phenomenon as a silver bullet to climate change. Yet, it is becoming harder to deny that investing for the planet alongside profits is making a real and increasingly visible difference. ExxonMobil and Chevron are the two latest examples, but representatives of sustainable and ESG funds are making themselves heard in hundreds if not thousands of boardrooms around the globe.
The greater the amount invested in ESG or sustainable funds, the more significant their voice when they engage with companies and the more votes for sustainable practices. Investing in ESG or sustainable investments is therefore a way any investor can vote for businesses to take better care of the world we live in. This may turn out to be lucrative in some cases, as Engine 1 believes. Several studies have already shown that ESG investing at least does not have to damage financial returns.
If you would like to learn more about sustainable and ESG investing read our guide here.
If you are a client, please ask about our ESG and sustainable investment offering in your next annual review meeting.
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