The Pebble Trust has been working to align its investment policies with its aim for a more sustainable, fair and low-carbon world – a challenging task in a world dominated by multi-national businesses which are rarely as focused on ethical issues. Recently we have been making some changes, supported by James MacDonald from RSQ Wealth. James gave us these insights.
With the undeniable reality of the climate crisis, it’s reassuring to witness the widespread commitment to addressing this emergency. Many of us have made significant changes in our daily lives, such as sourcing food locally, reducing single-use plastics, and switching to electric cars. There is another important way that we as individuals can have a positive impact on the planet and that is what we do with our investments. For most people that may mean their pension fund or bank account, but for The Pebble Trust that means the investments generating an income to fund the charity’s activities.
Companies have more money to spend than individuals and therefore have more impact on wider society. Many of these organisations are massive polluters, but there is scope to have a positive influence on them by investing our capital in a sustainable way.
Environmental, Social and Governance
‘Sustainable’ or ethical investing has been around since the 1800s however this early form was mainly based on religious beliefs. The modern idea of sustainable investing, commonly known as ESG (Environmental, Social, and Governance) investing, started to develop in the early 2000s. The term ESG was introduced in 2004 by the UN Global Compact’s “Who Cares Wins” report, which emphasised the significance of incorporating non-financial factors into investment decisions. This report set the stage for the UN’s Principles for Responsible Investment (PRI), which were launched in 2006.
Sustainability as a theme has continued to grow in importance over the past 20 years and is now a major consideration during investment decision making. This should make sense as investing is about determining the long-term potential of an asset. How can you come to an accurate assessment without considering the impact the company has on its surrounding environment?
Given this rise in popularity of sustainability, investment fund groups rushed to facilitate the demand, although initially without clear guidance from the regulator. Then, in November 2023, the Financial Conduct Authority (FCA) introduced a new policy, Sustainability Disclosure Requirements (SDR), primarily aimed at providing greater clarity around what a ‘sustainable’ fund is. As a result, a number of ‘sustainable’ collectives have been forced to close as they were not as green as they were claiming. Although this has seen the ESG investment space shrink, to below 10% of the market, it has shaken out the greenwash, resulting in a smaller number of better options.
Investors can choose to put their money directly into stocks and shares, or they can invest indirectly via funds. These large collective funds allow their managers to take a sizeable enough position in the company so the management has to consider their opinions. Alternatively those with enough capital can appoint a dedicated investment manager who can tailor a portfolio to select and avoid specific shareholdings.
There are examples of shareholder pressure making even the biggest emitters change tack and rethink their strategy. An example of this is ExxonMobil where shareholders were becoming increasingly vocal about the company’s environmental impact. As a result in 2021 a small hedge fund successfully placed three new directors on ExxonMobil’s board to push for more aggressive climate action. Another example is Nestle which has been under pressure from shareholders to address plastic waste. In response, the company committed to making 100% of its packaging recyclable or reusable by 2025 and has been working on reducing its environmental footprint.
Investing with a sustainable mandate
By investing in sustainable collectives or appointing dedicated investment managers, The Pebble Trust can influence large companies to adopt more environmentally-friendly practices. Obviously, the overarching objective of the Trust’s investments is to provide an income, however by investing with a sustainable mandate it can also help achieve the Trust’s moral goals as well.”
Our own conclusion at The Pebble Trust has been to move away from collective investments, where there’s an extra layer of management between us and the investee companies, and appoint an investment manager with the resources to research target companies and develop a portfolio to meet our specific requirements. This will include businesses which are supporting positive change, as well as avoiding those with damaging interests. It’s early days with this new approach, but we are hopeful that this will make it easier for us to see the impact of our investments, and give us confidence that they are doing as much good as the rest of our activities.
Many thanks to James MacDonald from RSQ Wealth for providing this month’s blog post.
