Environmental, Social and Governance or ESG investing has been a buzzword for quite some time. Every time Greta Thunberg makes a speech, investment fund managers take it as an opportunity to get in a plug for their latest ‘sustainable’ fund, and investors start to feel guilty about their pension funds position in Shell which has really done quite well.

In our opinion, this whole thing is nonsense.

Hold on, put down the pitchforks. We’re not saying climate change is a hoax or that protecting the environment isn’t important or anything crazy like that. What we are saying is that we’re not convinced that so-called ethical funds really offer anything to investors other than some top notch marketing spin and higher fees and charges.

With that said, we believe very strongly in the power of expressing your values through your money. Voting with your wallet is one of the most powerful actions an individual can take, because the unfortunate truth is that the only guaranteed way to make a company change their business model, is to make their old one less profitable.

Before we get into that, let’s take a quick step back and recap what ESG investing actually is and how it’s become such a major talking point.

The real truth about ESG

What is ESG investing? If we cut through the noise, it’s mainly just marketing spin. There is no set definition of ESG investing. Funds will receive a ‘5 star green’ rating from one research house and a ‘2.75 ESG Index’ rating from another. Those are totally made up by the way, but they’re about as useful to investors as any of the real ones. 

To give a more PR-friendly explanation, ESG investing has become a catch-all term for investment funds that have objectives that aren’t simply based on profits. Some funds focus specifically on climate change, others on energy production, others on avoiding specific sectors such as alcohol, tobacco or weapons.

These types of funds have actually been around for a long time. The origins of ESG investing can be traced back to the 1960’s with investors who wanted to avoid in areas such as tobacco production or the South African apartheid regime.

Over time, fund managers have developed more and more funds to cater to various different ethics and beliefs. As you’d expect, ethical preferences are incredibly wide ranging.

Therein lies the problem.

Why ESG investing doesn't work

It’s simply not possible to create a fund or even a series of funds that caters to everyone's specific individual preferences. Our ethics and standards are shaped by our own unique life experience, meaning they are as varied as our backgrounds and personalities.

Some investors may feel strongly about alcohol and tobacco, while others won’t care. Some investors will want to avoid weapons manufacturers such as Boeing (fighter jets), while others won’t see an aeroplane manufacturer as an ethical problem. 

Even if we could all agree on what fits in an ethical portfolio and what doesn’t, there is no best approach to matching those preferences to an investment strategy.

Should investors ignore the problem or fight for change?

One of the key issues is how we go about tackling the problems in our society from an investment standpoint. There’s no denying there are problems in the world. But for investors who feel strongly about them, is ignoring the companies who are perpetuating the problem really the right way to go?

Say for example you feel strongly about climate change. Do you avoid investing in energy producers and oil companies altogether, or do you selectively invest in the ones who are funnelling the most money into a pivot to renewable energy? 

If everyone who feels strongly about climate change avoids them altogether, that could mean that Shell or BP end up only needing to appeal to shareholders who don’t care about the environment. Are their business decisions then likely to be more environmentally friendly or worse in that situation? 

Every year a public company must hold what’s known as an Annual General Meeting or AGM. This is an opportunity for shareholders to vote on various plans for the business. It’s one of the best ways for shareholders to exert their influence and personal preferences on a public company. It gives them a platform to have their say on the future direction of the business.

Without ‘activist investors’ at the Annual General Meeting giving them an earful about the environment, I’d say there’s a fair chance the Board and Executives would spend less time worrying about it and more time working out how to increase quarterly profits.

All of this is to say that right now, ethical investing is messy, unclear, expensive and generally providing very poor returns . The marketers are having a great time pulling on our emotional heart strings, but there is a better way to use your money to impart a positive impact on the world.

The alternative way to express your values

A much more effective way to express your personal values and beliefs is through the way you spend your money and live your life. 

Direct Charitable Giving

Philanthropy can be another buzzword but done correctly it can allow individuals to impact people and the world in a very real, tangible way. This could include donating regularly to a charity, holding charitable events or even volunteering regularly for organisations working on causes that are important to you. 

For the more well off, there are more sophisticated options such as setting up a charitable trust which can assist with all manner of causes. As a side benefit it can also be a savvy financial move, reducing things such as Inheritance Tax.

Not only will you be able to see the change that your money makes, you’ll have far more control over where that money goes.

Spend for Good

On a more day to day basis, there are a thousand and one choices individuals can make as consumers that lead to a better future. Whether that’s shunning fast fashion, limiting air travel, investing in renewable energy for your home or trying to eat less meat, you can channel your expenditure in a way that reflects your own beliefs.

The benefits of changing your spending habits also compound. Say for example you decide to only buy from brands who prioritise sustainability in their business. Your spending will directly improve that company's bottom line and will allow them to grow, hire more people and become a more popular option for other consumers.

Patagonia is a brilliant example of this. They’ve grown to become a very large and well known outdoor apparel brand, while retaining their strong values across their entire business. Their founder Yvon Chouinard recently gifted the company into a charitable trust, with all of the profits generated in the future going towards fighting climate change.

You might not have a company worth £3 billion to give away, but even those smaller changes can add up to a major difference. Taking the Eurostar train from London to Paris will not only be faster than flying, but will also only create 22kg of CO2 emissions compared to 244kg from the flight.

For a family of 4 that means reducing CO2 output by almost 1 tonne.

At Rosecut your preferences and lifestyle are central to everything we do. If you’d like to discuss how we can build a plan around the life you want to live and the world you want to live in, book a call with us today.

Please note that this is not a financial advice and it does not take into account individual circumstances. Please also contact a professional advisor prior to any decision making.

The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. You should be aware that past performance is no guarantee of future performance.