Sustaining sustainability

After months of dark and freezing days, I probably speak for everyone when I say hurray it’s (finally) March. At last, we’ll have some sunshine past 6pm and maybe if we’re lucky double-digit temperatures…?! I always find the first couple of months of the year too gloomy and tiring –this year especially, after such a turbulent year for financial markets. But there hasn’t just been a significant shift in the landscape of the markets since last year. People seem to be getting more fatigued and polarised hearing and talking about ESG issues and sustainable investing too. Have they been over-hyped over the last few years, or what else might be causing this change and what can we do about it?

The Schroders Annual Advisor survey 2022 showed that the upward trend of clients asking for sustainable investment options slowed last year, as did the percentage of advisers specifically considering sustainability and environmental, social and governance (ESG) factors as part of their fund selection process. As I discussed in my blog A difficult balancing act, it’s likely that the war in Ukraine is partly to blame. The war shone a light on the conflict between reducing investments in fossil fuels to help the transition to a low-carbon economy and the need for energy security. Difficult market conditions last year, alongside the cost-of-living crisis, probably also put sustainability concerns on the back burner for your average client. It’s not really any surprise that people are experiencing a bit of short-term ‘ESG fatigue’ here due to multiple crises hitting them one after the other – Brexit, COVID and cost of living. 

But it’s just as important as ever that we do our best to equip advisers to have proper, in-depth conversations with clients on what type of fund might be the best match for their values, whatever they may be. Whether that’s traditional, more of a ‘transition’ portfolio still holding the likes of Shell and BP or a ‘fully sustainable’ portfolio. Our Demystifying responsible investing guide for advisors could be a helpful place to start. The slight deceleration in demand for sustainable investment options is likely to be as short-term as market volatility tends to be. And with the vast majority of advisers still seeing an increased demand for sustainable investment options in the last 12 months, there is no question in my mind of this type of investing fading away.

But it does raise an interesting wider question on whether some investors had piled into sustainable funds because they were chasing performance, rather than to align their investments with their values. Over previous years, particularly during the pandemic, stocks and sectors with strong growth characteristics (such as renewable energy and medical technology) that these funds tend to hold more of had outperformed traditional value sectors such as oil and gas and financials. Clearly last year this reversed - growth stocks suffered as rising inflation and interest rates caused investors to put a higher discount on their expected future earnings. 

Our sustainable Rathbone Greenbank Multi Asset portfolios have the same return objectives and risk targets as our core range. But while the destination for the two is the same, we’ve always been honest about the likelihood that the journeys will be different. There will be times in the short-term where the sustainable range could outperform its core counterpart and times when it could do worse. This is why it’s important that investors put their money into sustainable strategies for the right reasons - trying to chase performance isn’t one of them.

Though greater levels of ESG cynicism have coincided with short-term performance struggles, there are other reasons for increasing polarisation – including virtue signalling. Over recent years there has been a lot of pressure on companies to put out public policies and statements on ESG issues such as net-zero emissions targets, plastic usage and diversity to avoid backlash from the public. Though this started out with the best of intentions, it has led to some ‘woke-washing’ where company claims are losing meaning and investors are becoming sceptical of the ESG claims they make. This has particularly come to head across the Atlantic where we’ve seen a growing number of states publish anti-ESG bills. The first ESG-related bill was implemented in Texas last year penalising certain asset managers who exclude fossil fuels or gun manufacturers. Other bills prevent state funds from sacrificing returns in order to consider ‘non-pecuniary’ items. Some of this legislation is definitely arising as a result of misinformation and confusion – the goal of ESG integration has always been to better assess the risk/return profile of investments to achieve better long-term returns for clients. And while this has been fostering anti-ESG sentiment in some pockets, positive interest in ESG issues is also showing no sign of dissipating – for example ESG-related shareholder resolutions in the US were still up 22% to a record level in 2022. 

We’re also seeing the cynicism of company sustainability claims extend to sustainable funds. According to research from the Association of Investment Companies (AIC) only 1% of advisers completely trust funds’ sustainability claims. The industry has work to do here to improve trust –some of which upcoming regulation  should help with. There are a number of processes we already have in place to minimise greenwashing risk in our sustainable multi asset portfolios and help advisers trust us. We never take company claims about ESG issues at face value – if we’re a bit more sceptical it means our clients don’t have to be. And while we exclude areas incompatible with sustainable development, so our clients don’t have to worry about any fast fashion or fast-food companies sneaking in, we also don’t just blindly invest in companies claiming to solve the next big sustainability challenge either. We balance return, risk and sustainability in equal measures to make sure we’re still investing in quality, robust companies who are also supporting people and planet. Sometimes that means that despite being excited about companies playing into sustainable themes such as hydrogen or the blue economy, we have to wait until the investment case becomes stronger. But we’re willing to wait until the time is right. 

Tune in to The Sharpe End — a multi-asset investing podcast from Rathbones. You can listen here or wherever you get your podcasts. New episodes monthly.