A good rule for investing is to invest in what you know about or where you will have an edge. Warren Buffet calls this concept the ‘circle of competence’. As a PR agency that works with ESG investors every day, responsible investment is something we know very well. Which begged the question… why not start our own fund?
So purely for the purposes of our own curiosity and to empathize with the day-to-day experiences of some of our clients, we decided to invest a small amount of ESG Comms money into a selection of ETFs, funds, and stocks… to see how we did.
Setting some principles
First, we created an internal set of investment beliefs and principles that could serve as our responsible investment policy. For example, we chose to exclude industries such as tobacco and weapons, and to apply a belief that our investments should ‘avoid harm’… and therefore only invest in assets that either have a net positive impact on the environment and society now or have credible plans to do so (according to bodies such as Transition Pathway Initiative).
Selecting our portfolio
We then asked each member of the team to select from a mix of stocks, funds and ETFs that could both capture growth and perhaps have a positive impact on the world. Here’s a selection of some of our choices:
- We’ve always been impressed by the level of detail and insight that research from the WHEB Asset Management team offers, so the WHEB Sustainable Impact Fund was an obvious choice from one of our senior team members. They deliver consistently good returns and we like their ‘impact calculator’, which helps investors to see the size of their impact based on the value of their investment.
- We enjoy promoting Climetrics every year, a rating of how sustainable a fund is based on CDP data, that was this year featured in the Financial Times. One of the funds to win a ‘four leaf’ rating, meaning its portfolio companies are doing more than average to reduce GHG emissions, manage water resources and tackle deforestation was the Montanaro Better World Fund and so that was one of our investments.
- After many years of working with the $33 trillion FAIRR initiative, we’ve been convinced that investments in plant-based replacements for animal proteins have both excellent growth prospects and real-world sustainability impacts. We thought that we might be a bit late to the party with Beyond Meat so opted for Else Nutrition, an Israeli company making plant-based vegan baby and toddler milks which saw significant growth in 2020.
- As the low carbon transition picks up pace and pressure grows on heavy emitters, we have selected China Recycling Energy Corporation as we believe there is a strong case for its energy-generation projects from the by-products of industrial processes, particularly in a nation that is increasingly showing more climate ambition as seen with its net-zero commitment and Blue Sky Policy. For similar reasons we also selected Next Era Partners, the subsidiary of Next Era Energy, one of the largest producers of wind and solar power in the world and ranked as one of Fortune’s top 25 companies for innovation and impact across the globe.
We discussed at some length the fact that Next Era Energy does have contracted natural gas pipeline assets. However, the team felt comfortable selecting the stock, as natural gas is the cleanest-burning fossil fuel and some of its plants use combined-cycle technology, which offers increased energy efficiency and lower emissions than conventional fossil-fuelled units. We also felt that a complete shift to only renewables is not realistic and a gradual phase out of fossil-fuels will be needed, and for this, natural gas does offer the cleanest option. A similar discussion to that currently being held in Brussels on the EU Taxonomy.
- During the pandemic, evidence has revealed that ESG funds have outperformed the market. To more closely examine this, we selected Invesco S&P 500 ESG UCITS ETF, which has been constructed to provide a risk and return profile similar to that of the parent index, while improving ESG characteristics. We will be watching this closely to see if it outperforms its parent index.
And performance is…
So this ESG investing malarkey is easy right? Wrong. We are now one month in to our journey into ESG investing and can reveal that our portfolio performance is in fact down 7%. Turns out this investing game is not as easy as it looks.
As beginners, and given that we are not watching the market too closely – we do have to keep our focus on ESG public relations after all! But to quote Warren Buffet, “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” And we staunchly believe that by investing in entities with robust ESG criteria, we are investing in only wonderful companies.