A prominent magazine recently printed an article on ESG titled “Three letters that won’t save the planet”. Three issues with ESG investing were highlighted: there’s no coherent guide to the trade-offs investors might face; the link between virtue and financial outperformance is suspect; and the problem of measurement in terms of scoring companies.
As managers of the Sanlam Sustainable Global Dividend Fund, we believe fund managers have a duty to explain to investors what they should expect from investing in our fund. We pay particular attention to describing the performance we aim for in relation to the risks we take in delivering it. We cannot predict the future, but we can explain how we are different to our benchmark in terms of, for example, exposure and style. For example, we exclude parts of the market for sustainability reasons. Likewise, we don’t own companies that don’t pay a dividend. On the other hand, as a core fund, we have limited style biases to value and growth. But such trades-offs are common across all active equity funds. Funds are active, as opposed to passive, because they are different to the market. All fund managers will have biases whether they are linked to growth, value, size, or some other factors. In all funds there are trade-offs. We do not see our exposure to companies with strong sustainability credentials as any different in this respect.
In terms of the link between virtue and financial outperformance being suspect we keep it simple. MSCI have an MSCI ESG Leaders Index. This index is made up of companies with higher ESG scores. Google the monthly factsheet and look at the performance of the index against its parent index, the MSCI World (better over 1, 3, 5 and 10 years). The MSCI World Index is the standard benchmark for most global equity funds. We don’t call that suspect.
The problem of measurement is something we agree with. Different ESG rating providers have different scores for the same companies. In the same way different research companies have different recommendations for the same companies. In the same way different fund managers with the same objectives own different companies. We could go on. This highlights the importance of doing your own research. We model all the companies we own. This includes a financial model as well as a sustainability scorecard. We use external research providers to provide investors with the objectivity they ask for.
Sustainable investing is less about saving the planet and more about offering investors the choice to invest in companies that exhibit strong credentials in terms of their approach to environmental, social and governance issues. Now that must be something good.
Fund risks
The Fund has holdings which are denominated in currencies other than sterling and may be affected by movements in exchange rates. Consequently the value of an investment may rise or fall in line with the exchange rates.