Page 24 - Taking Stock 22 Summer 2019

Summer 2019 Taking Stock Not all ESG managers are created equal Managing ethical issues A particular challenge of ESG investing is the divergence in thinking across institutions when considering the societal and environmental impacts of their investment activities. It is uncommon for two different investment policies to contain identical exclusions, or even philosophies towards investing. In particular, ESG investors may focus on a narrow or broad range of issues. Viewing the investment universe through a narrow lens is less common. However, investors with a broader range of concerns are likely to hold different levels of concern and different priorities. Carbon emission minimisation, for example, is typically a key feature of ESG investing. However, policies vary signi cantly from those institutions that screen out only the most egregious emitters of CO2 to those that demand zero carbon emissions from all companies in which they invest. Issues that tend to enjoy a high level of investor consensus include tobacco and prohibited weapons, such as chemical, biological, cluster munitions and land mines. There is widespread agreement among ESG investors that such products do unacceptable harm and that they should not invest in businesses whose primary purpose centres on their production. However, there is greater ambiguity when businesses engage in excluded activities, but only as an incidental part of their overall business operations. An example might be a mining company that provides essential raw products that are widely used, such as iron ore, aluminium and copper, but also engages in coal mining. It is now widely accepted that coal mining and its subsequent burning in power generation contributes to harmful climate change. Whereas a committed ethical investor would screen out such companies, an ESG risk focused investor might consider them further if they had overall strong ESG characteristics. These might include mining ef ciently and remediating mine sites on completion of mining operations. Other areas where investors are likely to adopt differing positions are in the elds of human rights or animal rights. Investor attitudes towards such issues depend on values, which are likely to vary materially from one investor to another. Whereas ESG investing is based on scienti c evidence correlating environmental or social harm with a business activity, an ethical approach rests upon a values framework, which might be driven by a desire to avoid all harm to animals. Managing supply chains in a responsible way has been a key ESG priority since the 2013 Rana Plaza disaster when 1,134 garment workers were killed in a building collapse in Bangladesh. The expectation that companies source supplies ethically is widely held. Most well governed companies understand the risks to their business in the form of operational disruption and reputational damage, which may occur if something goes wrong in the supply chain. However, investors do expect fund managers to engage with companies and to endeavour to hold them accountable for their supply chain practices. Governance is another area of ESG investing where investor expectations and manager priorities vary. Diversity, executive pay, shareholder rights and board independence are all key areas which require engagement by investment managers. However, the relative importance that investors attach to different aspects of the governance process will depend on perceptions of long-term value that can be created through such a focus. 24