I don’t, of course, wish to sound too dismissive of the concerns that have driven these huge asset flows. While domino-like declarations of climate emergency by governments around the world appear to be somewhat hyperbolic, there is plenty of scientific evidence to support the idea that we should mitigate human activity that is harmful to the planet and society. Business investment in cleaner technology will play a major part in this, and evidence suggests businesses that are well governed outperform those that aren’t – a compelling investment case all round, especially as ownership allows investors to direct companies towards the better future they desire.
But as with most trends, how do we distinguish between the real deal and the mere bandwagon jumping? There is a view that the headlong rush by active managers into ESG is in large part a response to the existential business threat they face from exchange traded funds (ETFs) rather than a real desire to save the planet. That echoes the findings of a report published this week by SCM Direct – home of high-profile campaigner Gina Miller – which argues that many of the funds being sold as ethical are very far from that, but instead use a veneer of ESG credentials to hide portfolios stuffed with ‘vice’ stocks – greenwashing, in industry parlance and as the report is titled.
SCM is calling for greater regulatory scrutiny to stop asset managers promoting funds with misleading ethical claims about their products, particularly around exposure to sectors such as tobacco, gambling, alcohol and defence. Sensibly, its authors argue that it is not the exposure itself that is necessarily the problem, but that buyers of ethical products need to be able to see what they’re buying – 100 per cent transparency of holdings, they say, is the key, and who could disagree.
Indeed, one of ESG’s biggest problems remains how it is defined, because ethical questions are mostly a very personal matter, and few companies could truly claim to tick every ethical box. And while it is hard to find much good in industries like tobacco or gambling, the impossibility of truly defining what it means to be ethical is laid bare by the defence industry, the subject of this week’s cover feature. At a time of rising geopolitical tension, credible deterrents arguably prevent rather than provoke conflict, and that could make them a powerful defensive investment. Because wherever your moral compass points, there is no fluffy alternative to national security.
*This article was updated on 12 November to reflect the fact Gina Miller works for SCM Direct, not SCM Capital
