It is Good Money Week. That is the one week a year where the financial services community seeks to raise awareness about responsible investment and how it can benefit businesses and society.
- Most surveys suggest applying an ESG screen improves performance
- But not all companies are tainted by poor governance
- Some metrics matter more than others – poor regulatory compliance and diversity, for example, may have a more profound impact
Do clients really care about investing ethically? And if not, should they be encouraged to care?
Most surveys suggest that applying an ESG screen improves investment performance. It helps avoid the worst performers who, dogged by corporate scandal or overwhelmed by debt, see precipitous falls in their share prices. It can also help isolate those companies that are run wisely and for the long-term.
But it's clearly an imperfect science. Companies such as Ryanair, for example, appear to be largely immune to reputational damage. Its share price has seen a steady 10% decline over the recent flight cancellation problems, but remains above its level at the start of the year and double its level three years ago.
What should investors conclude from that? Certainly, it depends how companies market themselves. If they market their product as cheap-as-chips and no-frills, there's less to lose. But also, investors could conclude that there are some risks that are more important than others.
Companies that play fast and loose with regulation, for example, are more likely to see a hit.
Companies that play fast and loose with regulation, for example, are more likely to see a hit. That would include some of the carmakers, but also a number of the most disruptive companies have fallen prey to this. It is not enough to be disruptive, regulators need to look to the long-term, and what is good for consumers in the short-term may be bad in the long-term because of a lack of competition. Most disruptive companies have learnt that they have to play ball with regulators and competitors to be allowed to grow.
Other ESG considerations have a less obvious, but longer-term impact. The recent surveys on the gender pay gap and lack of diversity suggest two things: one, is that companies are not paying women and ethnic minorities anything like enough and two, they are paying a certain type of employee far more than they should be. Alongside siloed thinking, and all the other problems associated with a lack of diversity, poorly diversified companies have, in essence, an efficiency problem.
There is perhaps another reason why investors should be encouraged to care about these things. People don't save enough, and part of that is that they don't trust those who provide investment management. Showing that investment managers are mindful of these issues is a clear reason for investors to engage.