As with most things in Financial Services in Ireland, (Environmental, Social & Governance) ESG Investing in Ireland is one that takes a bit of figuring-out, if you want to do it right that is! In the hope that it will help you build and protect your own wealth, I share the following in this short piece:

• The theory of ESG investing in Ireland, and why it is to be applauded
• The practical application of ESG investing for Irish Investors, and why it is less than straight-forward
• Some revealing research that shows most ESG investing is not actually ESG at all!
• What we will do to get to the bottom of it

Unlike most advice firms, Informed Decisions doesn’t claim to know everything about everything (beware any advisor that does!). We know our areas of specialism and continue to sharpen that expertise, while also continuing to learn about the other non-core areas. ESG investing in Ireland is another example of areas of investing in Ireland that I am not an expert in. Having said that, as someone who has a professional obligation to clients to help them stay informed, and a personal obligation as a reasonably environmentally conscious person, I’m on a journey of discovery so to speak. I’d be delighted if you joined me!

The theory of ESG investing

Starting with the basics. ESG investing is a form of investing that focuses as much on the underlying company’s impact on the planet as it does on achieving long term financial returns. If you as an investor want to invest in an ‘ESG’ way, you will want to invest in a company or a basket of companies (Index/Fund) that prioritises activities under the 3 aspects; Environmental, Social and Corporate Governance. Rather than me listing what the activities are, see below helpful graph from US Sustainable Investing Forum (US|SIF).

There is a lot to it!

As a human race, we are all obviously becoming more aware of the impact that we are having on the planet, and it’s current habitants. As a race, many continue to abuse the planet’s resources, and the people on it, for profit and gain!

Regulators have now also joined the ESG club, with new regulations requiring firms to determine and divulge ESG data on their funds and indices. It also requires certain checks from advice firms as part of the advice process.

A piece from Bloomberg earlier this year suggested that ESG investments could make up approx $50 Trillion (or 30% of all investments globally) by 2025, and that as of 2020 it stood at c$30 Trillion.

It’s a popular and growing aspect of investing obviously.

ESG Investing, In Practice:

In practice, if you want to invest cash or pension funds in a way that aligns with your personal values, it’s not easy. Ideally, if you are keen to invest in an ESG way, you simply select funds or Indices that are:

• Accessible
• Diversified
• Proven Track Record
• Prudently Managed & Run
• Cost-effective
• & Are actually focused on Environmental, Social & Governance activities

As virtuous as investing in an ESG manner is, we are in the relative infancy of ESG investing, so consistently and confidently ticking all 6 of these boxes in your investing really is easier said than done! Here are my current perspectives on those aspects of ESG investing in Ireland as of today:

Access:

Google ‘ESG investing in Ireland’ and you’ll – there are lots of investment companies and insurance companies talking about Sustainability and Net-Zero in their investment approaches. Despite this postulating, actually finding an ESG fund from any of the big providers in Ireland is like finding hens-teeth unfortunately. While they all have the brochures and are members of the right committees and forums, actually making it easy for people to select an ESG investment is not easy. Maybe it’s them trying to develop scarcity factor, in the same way that everyone wanted to book a Concorde flight once it was announced they were discontinuing it!? Who knows.

If you are investing via a Platform you’ll have lots more choice (which makes it difficult to pick of course!), but retail investors in Ireland really don’t have much choice on the face of it. According to Bloomberg, of the $203 billion in 2020 ESG fund inflows (at end of Quarter 3) about $50 billion, 24% of it went into ETFs globally. So ETFs are a big route to market for investors in ESG.

Diversification:

A core aspect to any prudent long term investment approach is diversification, of course. Some, but not all ESG funds are scarily un-diversified. They might invest in particular sectors of energy only, or particular type of industries only, or particular projects only. The might for example invest in companies that invest in building new nursing homes (under the guise of being more socially conscious) or some such. Be careful if pursuing ESG investing in Ireland that you are selecting certain narrow ESG funds that you have sufficient diversification across the rest of your portfolio or overall holdings.

One needs to thread carefully to ensure your social conscience doesn’t lead to your financial unconsciousness!

Me!

And of course, picking certain industries might serve you extremely well in certain periods (New Ireland’s ESG Alternative Energy Fund has sky-rocketed by c100% since May 2020, prior to which is was under-performing non-ESG!), having a broad and diversified approach has proven to be far more prudent for us long term investors.

Proven Track Record:

As you will know by now, the financial services industry is more than happy to create supply to meet demand for products – and ESG is no different! As a result, there are truck-loads of ESG funds and ETFs coming onto the market the whole time. Much like Crypto currencies, the frenzy to buy is such that one needs nothing more than a nice title for your fund and a shop-window, and some people will invest in it!

This does of course result in a lot of lame duck ESG funds being launched. It also results in a lot of investors ending-up in really bad investments and achieving poor performance and worse. A double-whammy of nasty when said investor was trying to make a positive difference in the first-place! Many ETFs for example have only been in existence in the past 3 years, which is not exactly confidence-inspiring.

Prudently Managed & Run

It would never make sense to write-off a fund manager purely on the basis that you might not have heard of them before, but in the universe of funds, there are so many firms offering so many different types of ESG propositions. For retail investors, it becomes impossible to verify and have any confidence in so many providers.

What we really want of course is an option that will deliver returns in line with the underlying market we are investing in – that nothing crazy will happen and that our money will be safe. If given the choice of a high-street provider offering sub-optimal solutions, and a no-name firm potentially offering a super solution, most will pick the sub-optimal route.

Cost-effective

Even looking at UCITS funds, and taking the BlackRock ESG Multi-Asset option for example. We can see an AMC of 0.5% but an OCF of over 1% per year. Compared to their equivalent non ESG option from the same firm, that’s about 6-times more expensive, for what!?

The above mentioned New Ireland fund that has gone gang-busters in the past 18 months or so has a quoted total expense of 2.9% per year. Almost 3% fees per year!? ESG shouldn’t be and doesn’t need to be this expensive in my view, and it certainly doesn’t offer value for money for investors. I don’t care how nuts the very recent performance has been, 3% is off the scale.

Actually focused on Environmental, Social & Governance activities

This is the big one! And there are two principal aspects to be aware of here:

a) A Lot of so-called ESG funds are not at all very different to regular non-ESG funds in terms of the companies that they hold! For example take a look at iShares ESG Aware ETF (which was listed by fool.com as one of the top 9 ESG funds to invest in!) With 334 underlying companies it’s nicely diversified. But look a bit closer and you’ll see it’s top 5 holdings make up 20% of the total portfolio, and they are the same companies as you’ll see in any other US-centric Equity index (Apple, Microsoft, Amazon, Tesla, Alphabet!). This perfectly portrays two points; 1) Main-stream equities are themselves becoming more ESG, partialy removing the need to pursue ‘ESG funds’ and 2) Just because something says ESG on the label doesn’t mean that all the companies it holds are going around on bicycles planting trees all day!

b) The second big issue on ESG is the fact that much research has been done, and is still on-going as to how ESG a lot of the ESG offerings actually are! ‘Green-washing’ has become a well-known term. Granted, there are rating agencies jumping on the band-wagon now. As a result we have things like the MSCI ESG Rating system which is I guess supposed to help us compare one ESG to another in terms of how ESG it is, but in practice it doesn’t really work for ESG investing in Ireland, where most people don’t have access to a lot of the actual options out there tat have had that rating done on them!

Reclaim Finance are a non-profit based in France. They appear to be on a mission to research, promote and campaign to stop institutions from hindering climate-related regulations. Their 2021 ‘Slow Burn’ report analyses the fund operations of all the big-guns; BlackRock, Pimco, Amundi, Aegon, Vanguard, HSBC, AXA, BNP Paribas, Credit Suisse, Invesco and others. They specifically look at their activities in regards to coal burning, and it is an eye-opener. Of the 29 Asset Managers researched, the highest rated was only 52/100 in regards to climate commitments and coal policy. It really does make you look at the whole ESG offering globally in a different light.

Conclusion:

The suggestion that investing in non-ESG funds is detrimental to the planet is simply wrong I believe. More and more of the great companies of the world that we invest in already, are making serious strides in being more climate conscious. Most of us investors prioritise value, track-record, security and performance. I also believe that our habits and choices in our own lives on a day to day basis have more of an impact on the planet than whether we invest in a nice-sounding ESG fund or a non-ESG fund.

ESG investing in theory is great. As we can see from above however, in practice it is currently much less so.

Paddy.