I once said to one of my sons “Money doesn’t grow on trees” to which he instantly replied that it did on the basis that money is made out of paper and paper is created from the wood of trees! A bit cheeky yet, in a way, true. Of course, it wasn’t exactly what I meant but I did admire his creativity. Another way of looking at it is that logs are produced from trees and can be exchanged for money.
What I meant of course was that I didn’t have an endless supply of money to satisfy his never-ending wish list of wants. Fortunately, my children are all young adults now so they don’t ask me for anything anymore.
There has been an ever-growing trend towards ethical and environmental investing in recent years which has created an alphabet soup of sustainability acronyms, abbreviations and definitions such as COP21, ESG, EV, IPCC and PRI to name but a few. This has caused an awful lot of confusion not only amongst investors but also advisers.
I attended a webinar recently on ethical and environmental investing during which the presenter talked about the various descriptions of the subject and he gave me the best summary I have ever heard. He said forget all other descriptions as the only one that sums it up perfectly is sustainability. Sustainability he explained means doing good and not causing any harm. I finally understood it all much more clearly.
Increasingly it is becoming apparent that our regulators, the FCA, will eventually require all financial advisers to take into account ESG (Ethical, Environmental, Governance) ratings when recommending funds to clients. This is perfectly understandable and reasonable because most clients would like to invest their money in companies that do good and cause no harm. The problem is that there is no uniform way to rank all funds yet so not all funds have ESG ratings and there is no central database of ESG rated funds.
Interestingly funds with good ESG ratings tend to outperform funds with poor ESG ratings so by investing conscientiously it appears that investors will achieve better investment returns too. A definite win: win situation.
Our associate company, Minerva Money Management, runs the CCM Intelligent Wealth Fund which does invest in companies with good ESG ratings yet we have been unable to get an ESG rating for our fund because Morningstar requires the fund to have at least 67% of its investments in companies with ESG ratings. Unfortunately, only 12 of our 28 holdings have ESG ratings because most of the Small Cap shares in our fund do not yet have an ESG rating. Minerva Money Management is a paid-up member of PRI (Principles of Responsible Investment) too. This is very frustrating for us because we do pride ourselves on investing only in sustainable businesses so we would like the accolade of a good ESG rating for our fund. I am sure we will get a good rating eventually because that is what we deserve.
In the meantime, we will focus on ensuring that the funds we recommend to our clients have good ESG ratings. Money may not actually grow on trees but ethical and environmental investing as epitomised by a healthy abundance of trees does indirectly lead to making more money and contributing to a greener planet. You know it makes sense.*
* The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of and relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.