As global leaders gathered in Scotland for COP26 last year, it became increasingly clear that a majority of investors around the world now reject the idea that companies are responsible only for creating value for shareholders.

Most believe it’s their responsibility to hold companies accountable for their impact on society – including climate change and inequality.

Trillions of pounds have shifted into Environmental, Social and Governance-linked financial products and services and the Financial Conduct Authority (FCA) points out that ESG aims are immensely important, with net retail sales of UK responsible investment funds reaching almost £12 billion in 2020 – though it adds there are risks if the financial sector responds to rising consumer awareness of ESG issues without a supportive regulatory foundation and adequate guard-rails.

These are familiar issues to Acumen Financial Planning, founded in Aberdeen in 2002 as one of the first firms to provide financial planning as a stand-alone professional service in the north-east of Scotland and which now has offices in Edinburgh, Elgin, Glasgow and Peterhead.

 

Safety first

Managing director Sandy Robertson believes that the essence of financial planning is carefully guiding his clients from A to B with complete financial safety, developing a professional relationship them that lasts for many years.

He’s seen numerous trends in the sector: “ESG wasn’t a familiar term when Acumen was founded but our investment committee started to look at it seriously a few years ago: on the supply side we thought we should be offering an ESG option and on the demand side there was growing interest from clients.”

He does though have reservations about grouping the terms Environmental, Social and Governance under one umbrella label.

“The environmental aspect – ensuring that the planet survives – is something that the whole world can address, regardless of culture or government. Whereas the social element will vary from country to country, as will the governance factor,” he says.

Acumen sees most of its clients annually to reappraise their aims and ambitions, and while ESG is featuring increasingly in these discussions, it has not been a sudden phenomenon.

“While there is a significant minority now seeking to engage in ESG and have their portfolios tilted in that direction, the majority still don’t – not because they don’t care but because they don’t think that is necessarily an effective approach for them.”

 

Different objectives

ESG then, depends on the individual and their financial goals. Robertson says that for the firm’s more mature segment, non-ESG is currently the default route, with ESG being introduced when it is needed – while he acknowledges that there is a demographic demarcation, ESG is the default as the initial discussion point for younger accumulators.

The fund management industry, he points out, is always keen to make extra sales. “They are either proactively setting up ESG options or defensively playing catch up, introducing those options.”

While there are complications surrounding shares that already exist in the secondary market (for instance in the fossil fuel sector) he concedes that ESG is, although more gradually than some would lead us to believe, the inexorable direction of travel.

“Ultimately, perhaps in a decade’s time, becoming a listed company will involve the obligation to demonstrate that your governance in these matters meets the required standards. The world, though, is a big place – different countries have different norms and some stock exchanges may be less demanding than we might like.

“Governments worldwide must set standards and objectives regarding ESG and the environment and fund those,” he says, adding: “It’s not something that can be left to the investor: it’s up to governments to take the lead.”

 

Major events require new thinking

Recently, adds Robertson, imperatives have changed, dramatically highlighted by Russia’s invasion of Ukraine. “There will be the need to rebuild a country with all the infrastructure that entails – and in Europe the need to rebuild the security of energy supply.

“These are things we weren’t thinking about 12 months ago when the primary concern was – rightly – climate change. But as our eyes open to other dangers, we will continually need to find new solutions because the situation is never static.”

To achieve the aims of ESG, he adds, requires massive investment in the transition from traditional energy sources to wind, solar, wave and tidal power. “And it’s not a given that if you invest wholly in ESG funds that you’ll be able to retire five years earlier; you might have to accept that it’s five years later.

“Many people are happy to do so because they are doing their part by investing in long-term capital projects and while governments are right to make commitments it’s easy to talk about outputs and the targets we’re aiming for we need to work back to the inputs – the things that individual countries, states, cities and people must do to move the needle on that output meter.”

 

Look to the long term

While Acumen says that analysts suggest full diversification is probably still going to outperform the ESG portfolio of companies by around 1 to 2% a year, if more companies join the ESG ranks, which is highly likely, the decision to invest in them will become an easier one, though not insulated from threatening global events such as those we have recently seen.

Robertson returns to his conviction that investing is a long-term discipline, whether in ESG funds or not. “You are investing in capital markets and that usually works – though not always in a straight line.”

www.acumenfp.com

 

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