Green is never black and white


Whether we’re calling it Ethical, Impact, Sustainable, ESG, Responsible or Green, there’s a lot of confusion out there. Some fund buyers believe the industry no longer needs the ‘educators’, pointing to the growing integration of ESG factors in investment processes across the industry. Others say it’s definitely not ‘job done’. To navigate the complexity, we need to look beyond the ‘how’ labels, to what’s being invested in and why, says Christian Barnes, Head of Strategy at AML Group.

For the sake of simplicity, we’ll call it Sustainable Investing. Ultimately, however short-term the objectives may be, all of these forms of investing are responding in various ways to the multiplicity of our planet’s challenges – so ostensibly at least, they share a distance perspective. And ‘sustainable’ is really just ‘durable’. It is in French, anyway.

For many, the focus is on ‘how’ investing is done. From an assumption that the holy grail is what McKinsey(1) calls ’The growth trifecta’ (“revenue growth is good, profitable growth is better, but growth that advances ESG priorities is best”), the start point is ensuring the delivery of an SFDR 8 or 9 portfolio or showing alignment with UN SDGs or Scopes 1-4. Ticking the scorecards is the priority. But why has BlackRock’s Larry Fink, among others, declared that the ESG label is dead? Why has S&P dropped ESG scores from debt ratings?

Simply, it’s because ‘how’ we invest has direct consequences for ‘what’ we invest in. From an environmental perspective, leading with ‘how’ can deliver a low carbon investing portfolio. Societally it can reward organisations that are already exemplars of best employment practice. And these may both deliver strong investment returns, too. But these portfolios will quite likely be overweight on, e.g. financials and tech (low carbon producers) or in top-scoring companies with little incentive to improve their employment practices. Whist they may be strong investment candidates, what these portfolios invest in may disappoint in their contribution to fixing some of the challenges we face, societally or environmentally.

A focus on ‘how’ has also led to scoring and rating systems that are increasingly fraught with anomalies. Felix Goltz of Scientific Beta(2) recently found that “ESG ratings have little to no relation to carbon intensity, even when considering only the environmental pillar of these ratings.” The reporting burdens of cost and time for small organisations, that may be achieving great things in the name of humankind, are well documented; unflattering ESG comparisons with better resourced but considerably less high achieving companies can see them left behind in the investment race. Overall, the intended simplifying efficiency of scalable, systematic filtering often renders comparisons between investment targets almost impossible and regularly contradictory. Such anomalies further complicate a field which surely grew from simple principles.

In the round, what Stuart Kirk described recently(3) as “Death by fatuous and incomparable data” means that fundamental, long term investment opportunity can often be ignored in companies that are seen as contrary to sustainable investing. These might include companies exploiting fossil fuels to avert the cost of stranded assets (and the knock-on implications, for example, for lifestyles, employment, pensions or social provision). Or those channelling sizeable revenues from recently considered ‘dirty’ exploits to fund the discovery, development and deployment of alternative resources. This divide over transition pivots to an extent around the influence of rational and emotional drivers; some would have the world ‘just stop’, others seek societal stability and a considerably longer journey to fundamental change. We often see this dilemma play out among retail investors; in our annual ‘Investor Index’ study(4), findings regularly show UK investors’ prioritisation shifts between ethical investing (‘heart’) and self (‘head’), as means fluctuate. Of course, the influence of system 1 and system 2 decision making over-simplifies the stop/evolve debate; in between are many shades of grey, in part reflecting degrees of political impotence. Short office tenures frustrate long term public investment decisions as to future winners – wind? solar? hydrogen? fusion? – and the attendant infrastructural implications.

In an altogether different context, Simon Sinek controversially told us to ‘Start with Why’. In sustainable investing it’s a strong call. Alongside the fundamental objective of superior, stable investment returns, it is the motivation behind investment selection that can guide like-minded investors to comfort. Just following the scores can deliver good returns and may drive change – but if the ‘why’ involves making a real difference to the future health of society and the environment, then digging below the inconsistency of ratings is essential. And that can sometimes mean continuing to invest in the very practices the world needs to consign, over time, to history.

1 McKinsey August 2023
2 FT, 31 July 2023
3 FT, 5 August 2023
4 AML/Nursery Research 2020-2023