Once a source of anxiety for charity Trustees is the topic of environmental, social and governance (ESG) factors as part of the responsible investing agenda, and most commonly, whether to introduce a negative screen against certain stocks which could undermine their mission.
Apart from the fear over a potential loss of return (the debate is still open about that), possible exclusions usually present themselves in a range of gently escalating considerations, making it very hard to work out where to draw the line between the acceptable and the unacceptable. For example, investing in a gun manufacturer is associated strongly both with school shootings in the US and with our national defence. Such an investment would be as disagreeable to a Quaker charity as it would be natural to a military one.
Where once a minor factor for investing, ESG considerations are becoming increasingly mainstream with MSCI, the mammoth index compiler, now running its own ESG index. This index is used by some fund managers to construct their own ESG products, in effect outsourcing their own values to MSCI. MSCI organises its index ranking all firms as a leader or a laggard against their ESG criteria. The weakest stocks are excluded from the resulting ESG index because of their bad rating. This is similar to a credit rating score where the debt of the weakest companies (in financial terms) is given a ‘junk’ credit rating. Because this is below ‘investment grade’ mainstream, investors tend to avoid it, or expect very high returns to compensate them for the risk. The same could soon apply to the worst of the ESG offenders.
Signing up to an ESG index won’t help Trustees make decisions about whether exclude armaments, but it will improve the quality of their portfolio in terms of how it is run, both for investors as well as society and the environment. It’s a good – although not perfect – place to start in making the world a bit better. It will also save your board from anxious, inconclusive conversations about what it might do, if anything, before putting the whole thing in the 'too difficult' box.