ESG? No, its Time to Become Activist Investors

About 20% of all assets are now managed using some form of ESG principles. You wouldn’t know it though.

According to the Economist there were 70 activist campaigns in Europe last year. It feels like there will be more this year. The impact upon the progress of more sustainable business practices is notable.

ESG to the Rescue?

Meanwhile ESG is becoming more mainstream – McKinsey has published a blog claiming it the new normal. The Economist has also just pointed out that those with a millennial mindset are far more interested in ESG investing. There are however many shades of ESG.

At its simplest, a passive filter is applied which excludes a few sectors, whilst allowing investments in a range of companies and sectors that might surprise many. More active strategies introduce different levels of rigour. Then there are themed funds that focus upon specific sectors such as renewable energy. Finally impact investors concentrate on companies that explicitly deliver upon social outcomes as well as financial ones.

As a recent FT article points out though, there is not enough consensus on exactly what ESG is or how to measure it. It seems that all our efforts to fill out the questionnaires for DJSI, CDP and BBFAW et al are making little difference.

Activist Investors March On

Meanwhile, activist investors have cut through the fog with a very clear and simple narrative of margins and share prices. Lets face it, for those of us with pensions and savings, who would not want higher share prices and bigger pension pots.

Well actually not me if it is at the expense of the company and thus society itself. As I have argued before, activist investing is an extreme, that is “changing the circumstances”. The expectations on companies to make money for shareholders is drowning out the need to contribute to society. The important advances that have been made in recent years are under threat.

It seems to me though that the issue is not with activist investors, but the passive ones.

Asset Owners and Asset Managers

Passive funds are starting to have an important impact upon the market. Whilst their popularity is based (largely) on reducing the costs of asset management, they are weakening governance in companies. Index funds have no voice and do not talk to companies. This just amplifies the voice of the activist investors who do.

Asset managers of course do speak to the management of companies, but I wonder if they really speak on behalf of the asset owners. This is especially the case for pension funds.

Twelve years ago I set up my own self managed pension fund and transferred several of my company pension funds into it. I started to manage it and invest in companies that I wanted to invest in, according to my own beliefs. I became activist – putting my money where my mouth is.

Until recently however I was passive when it came to the pension fund managed by my employer. So I have decided to start asking a few questions and become more activist there too. Its worth doing, and sends an important signal.

We can all be Activists

There have been some concerns that ESG managed portfolios do less well than “traditional” assets. Yet there are plenty of studies that now show that assets managed with an ESG filter perform as well as or better.

Assets under management using ESG principles now total US$20-25Tn (trillion). Meanwhile activist hedge funds account for just US$150-200Bn. To give some perspective to this, the top four UK pension funds are valued at more than US$200Bn.

Its not too hard therefore, to see how relatively few pension fund members can easily make an impact, so we can all make a difference.

Its time to all become activist investors. We all need to ask our pension fund managers about their strategies regarding ESG. The more they hear interest, the more they will invest our money based upon these principles.

But we need to go even further. If we are to truly respond to the activist investor narrative, then we need to be activists for the other extreme of the investment spectrum – social businesses and impact investing. This will offer the alternative narrative to help change the circumstances again in the direction of creating shared value – for our pensions and for our society.

We need to ask our asset managers to increase their exposure to “impact investing”. My own self managed pension is seriously “overweight” (as they say) to deliver societal impact.