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ESG Phenomenon: The Irony Of Passive ESG, Wilton

Editorial Staff, 24 February 2021

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Developments and commentary in and around the ESG investment space.

Hawksmoor
"The Irony of Passive ESG" is what Jim Wood-Smith called his note to investors this week. Hawksmoor's chief investment officer perfectly captures the uneven nature of ESG funds and some of it is worth repeating here.

"We wanted to walk through the conundrum posed by passive ESG investment," Wood-Smith said. "There is no doubt low-cost ESG funds will be terribly popular. What could be more appealing at the moment than a fund that ticks both the ‘low cost’ and the ‘ESG’ boxes?" And what could possibly go wrong?

Never mind, he suggests, that the entire concept of passive ESG investment has more holes in it than a teenager’s jeans, when there is nothing in practice stopping a ‘sin’ stock from having a high ESG score. "Oil companies, tobacco companies, gamblers, boozers, polluters, plastic manufacturers can all score well; all that is needed is a string of statements and policies in the depths of the website. Honestly," he chides.

"If there is a role for passive ESG investment, it is for those who consciously disagree with ESG, but believe that it might drive higher financial returns. In fact, for an off-the-shelf low-cost solution for a client who has no ESG preference, I would actually encourage a passive ESG as being a better solution than a broad market tracker," he adds.

Where passive ESG can be useful, he suggests, is giving advisors a better understanding of what clients really want from their investments, and then evolving better solutions from there.

While he calls out the funds industry for dishing up "far too much product that is not fit for purpose", the same industry has also developed more than a healthy number of well-managed active funds. It is worth paying a few extra basis points to have properly researched funds and companies skillfully picked that actually accord with clients' investment preferences, Wood-Smith argues, making the case for why active managers must engage far more with ESG to avoid passive funds filling the vacuum.

"If you must, then please do use passive ESG funds. Just not for clients who care about ESG," he said.

Wilton
Professional services firm Wilton has launched OnePlanetCapital, a specialist environmental fund.

The fund, a UK Enterprise Investment Scheme, has been founded by Tony Flanagan of Wilton in partnership with entrepreneur Matthew Jellicoe. It works with investor and other groups to make investments that promote climate change measures.

OnePlanetCapital uses the 17 United Nations Sustainable Development Goals as its framework.

Each year, the fund will pick up to 10 sustainable green businesses and schemes to support financially by assessing environmental impact, social purpose and corporate governance in its investee companies, Wilton said in a statement.

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