Asset managers should view environmental, social, and governance (ESG) investing as a “reminder to do a better job” rather than a “straitjacket” set of goals.
This is the view of Impax Asset Management’s founder and CEO Ian Simm (pictured), who told FSA that his firm is focused first and foremost on the excess returns available from the sustainable transition.
He said that ‘ESG’ (Simm favours inverted commas for the initialism) investing has led to asset managers conflating corporate governance (something all investors should be concerned about) and environmental and social issues, which are just two of the many risks investors should take into account.
“’ESG’ was invented as a term by some clever consultants and was never designed to be a scientifically robust framework for thinking about the world,” he said.
“The trouble is that it doesn’t have a scientific basis. There’s no consensus about what it means exactly, and as has been demonstrated in places like Texas and Florida, it can be misinterpreted by some people as an ethical idea.”
In Texas, the anti-ESG backlash has manifested into some asset managers losing their contract to manage state pension funds on the accusation that they boycott fossil fuel energy producers.
This is in accordance with a Texas law that forces state agencies to divest from fund managers that boycott fossil fuel energy companies – which form an important part of the Texas economy.
Simm suggested asset managers and investors should think of ‘ESG’ as more of a reminder to do a better job as a capitalist.
He said: “We would prefer if ‘ESG’ sort of faded away, and we went back to challenging the three core steps of investment management which are: agree investment beliefs with your stakeholders, look for opportunities, and manage risk.”
“I think everybody will be better off thinking about ‘ESG’ as a metaphor, as a reminder to do a better job in those three steps, rather than thinking of it as a sort of straitjacket and three topics to analyse.”
Focus on sustainability instead of ESG
Rather than ‘ESG’ issues, Simm said his firm, which manages $50bn in assets, pays more attention to the excess return that can be generated from investing in the transition to a more sustainable economy.
“We make a very clear pitch to our clients that there is money to be made, or excess return, from investing in this transition to a more sustainable economy from a pure risk-adjusted return perspective,” he explained.
“However, for many of our strategies, there are some additional outcomes or outputs from our investing work around for example, materials conserved, or water recycled, or renewable energy generated, which are not objectives in themselves, but are byproducts of our investing work.”
“What we don’t do, is say we’ve got multiple objectives for our investment work because we think that’s confusing and in practice impossible.”
There has been a strong movement among asset managers to declare net zero targets, but many have done so without clearly explaining whether these net zero targets will come at the cost of financial returns.
Simm said: “We’ve been very clear to say that the objective of our business is to make money for shareholders; that’s what we do.”
“But we are going to go the extra mile in demonstrating non-financial results,” he added. “We’ve been producing impact reports now for almost 10 years explaining how many of our portfolios are performing in those environmental and social issues.”
Sustainable investing should be top of mind
While most generalist investors are concerned about the actions of the US Federal Reserve, the outlook for inflation, or the outcome of the US elections, Simm believes the sustainable transition should be top of mind for investors.
He said: “What is important for long term investors is the fact that Europeans are committed to decarbonizing their power system by 2035 and having no more internal combustion engine sales from 2035.”
“So, five years from now, we’ll be halfway through that period. We’ll also have seen enormous progress in that direction.”
“So if you’re a long term investor, you want to make sure you’re positioning for those two enormous dislocations.”
