Smoking
If there’s anyone left still smoking tobacco, 1 January is the usual time to give up and take up anger management to quell the withdrawal symptoms.
Of course tobacco is well known as the most commonly excluded sector in any portfolio under Environmental, Social and Governance rules, but if you look at a range of ESG indices, you’ll see that British American Tobacco is not considered egregious at all, just average. Not averagely egregious, but average when compared to other companies which operate over a wide range of industries and sectors. Similarly, another favourite, defence and weapons manufacturer BAE Systems, is either very good or very bad in ESG scores according to various firms analysing the data.
So here’s the problem: what makes an unattractive company as far as ESG is concerned isn’t the same as what makes an unattractive company as far as an investor’s morals are concerned. The two questions are completely independent of each other for obvious reasons but often conflated. Investors can have widely different moral viewpoints and ESG rating authorities will take a neutral moral view of the underlying businesses and instead focus on how well they are run, their carbon consumption and so forth. Like tobacco and vaping, we will not get into the discrepancies between the respective ESG rating agency scores for each company in this blog, but that is a separate and fundamental issue too!
Both ESG and moral investing are risk management tools. One (ESG investing) is a risk management tool focussed on dangers to the underlying business model (poor governance, fines etc), while the other (moral investing) is focussed on the threats to the investor’s own values. Good risk management is vital in all businesses but it will invariably get off to a poor start if if it begins with the wrong risk.
So, one of our New Year resolutions will be to help clients understand these two equally valuable approaches and clear the smoke for 2024. Do contact us for a chat.
Happy new year to one and all.
Guy and James