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So on Friday’s episode we switched it up when speaking to our guest Charlie Fleming. This time, we spoke more about ESG and ethical investments – what they are, how the scoring system works and how Charlie selects company to invest in!
Abdul: Charlie, welcome to the show. Thank you for joining us, please introduce yourself to our audience.
Charlie: I’m Charlie Fleming on my day job is the co-founder of a technology platform, Mentorxchange. However, I also am involved with VC funds where we do private investing on behalf of family offices. And I’ve also got a background in trading and finance, having worked in hedge funds for a number of years.
Abdul: So for this episode of Abdul Asks, we’re going to change up the questions because we’ve been talking to people a lot about their personal finance and they are intrigued with ESG investing and may not know a lot about it, or may think they know a lot about it. So I think we’ll go straight into the questions. What exactly is ESG investing? And how can a beginner get involved?
Charlie: Sure. I think you’re very right, Abdul, ESG is becoming a hugely hot topic within the financial services industry. In very simple terms, ESG, the acronym is environmental, social, and governance. So effectively, what you’re doing is making your investment decisions based upon those three factors rather than just solely on financial gain by looking at companies for what they do on an environmental level on a social level, but also their governance as a company. You know with people becoming more environmentally conscious, etc. people only think about the environmental part, but there’s also the social and the governance side as well. So in a nutshell, that’s what ESG investing is.
Abdul: So there are numerous factors that determine ESG scores. And actually, even the scoring system isn’t really universal across products and companies who are going to look at certain companies based on social causes. What do you think is important for an overall ESG score?
Charlie: Sure, because it’s in its infancy or relative infancy in the financial space – as with anything when it first starts being talked about, there’s lots of people trying to do what we call a land grab, ie, they’re trying to become the people who give the ESG score. As a result, you’ve got a lot of different rating agencies, including Moody’s, s&p, MSCI Sustainalytics, Bloomberg has got their own version, IHS market has got their own version. So you can see quite quickly how the world gets very muddled with all these different scores. And all these scores, each agency has their own way of treating each score, and they have their own view on things. So without wanting to go into too much detail about it, ESG scores, there hasn’t been a collective effort. However, recently, I saw an article in September, and it looks like the big four accounting firms, you’ve got Deloitte, PwC, KPMG, and EY are coming together to actually unify this scoring system so that people will be less confused. And there is a one size fits all model for that. So when it comes to the ESG, scoring, don’t get too bogged down in each one because fundamentally, the difference between ESG investing and traditional investing is, in my mind, it’s a lot more qualitative. So it’s more personal to you as an individual. And well, just to answer your second question, what do I personally look at, what I actually look at it from a top-down perspective, rather than the bottom up? I look at companies and I look at what that total mission is. So the example that I always use is British American Tobacco, right? They sell cigarettes. They have a very high ESG score, because their government is so good. And they in fairness to them, they are making efforts and inroads into the social side of things as well. But fundamentally, as a company, they sell cigarettes. So you know, they recently they’re moving into the electronic cigarette space. So their social score has gone up quite considerably in the last year because they are making efforts to offer alternatives to their product offering that aren’t just cigarettes. So there are lots of different factors that go into what I do when I make a decision as to whether invest on an ESG level. And I then try and mix that with my financial acumen as well
Abdul: So at the beginning of our conversation, we mentioned that more people – just on a social level – are now looking at things in an ethical stance. But why do you think more companies are now taking a more ethical approach? And if they’re not what impact do you think that has?
Charlie: That’s a very, very good question and one that I spend a lot of time talking to both people in business, but also people who are financial institution traders and hedge fund managers, etc. And really what it is, is a very chicken and egg situation where what we’ve seen in the financial industry over the last couple of years is individual investors (retail investors) are more actively managing their money. Beforehand, you’d have your savings your pension pot, and you would offload that to a pension provider to do that. However, now, retail investors – anyone on the street – are taking a more active approach to manage their money. As a result of that, the percentage of money that goes into companies through stocks and shares or bonds, or potential investors in these companies has increased considerably as to the different factors they have taken into account. Beforehand, you’d have five or six big players, the usual pension fund suspects, like BlackRock etc, coming in, and they would dictate how money is diverse and pushed into different companies. However, now retail investors are coming in and saying ‘Well, actually, I’m I want to actively manage my own portfolio‘. So as a result, businesses who are receiving the money in, they have to be more conscious and more transparent with the retail investor. This is coupled with the fact that retail investors are, on the whole, more socially conscious, and there is simply a more socially conscious vibe going around the world right now. Businesses are starting to realise ‘well, actually, we’ve now got to take into account both the institutions i.e our old school pension funds clients or investors, as well as our retail investors’. So as a result, they are becoming as a business, socially aware, because they have to think of it from a potential investor’s point of view as well.
Abdul: If we look at a different perspective, what do you think the main differences are in the process of actually choosing an ESG company? So if you’re new to kind of thinking about ESG products, and you want to invest, what do you think would be key factors to look for, when you are trying to pursue a company that has like involvement in social causes but also looking at future returns for yourself? What do you think would be the best tips to start looking into that?
Charlie: What’s lovely about ESG is that it’s very, it’s very different from person to person, what’s important to one person will be very different to what’s important to another person. And so, I think the trick is to not overcomplicate it, I think a lot of chat goes on around the scorings, and the ratings, etc. But fundamentally, what is important to us, an individual may not have anything to do the scores of the pool, the ratings that are given to a company. So again, going back to my example of British American Tobacco. If I’m less concerned about the environmental impacts and social implications of smoking, but I really want to invest in a company that has a mixed board and has a lot of representation on that board, then British American Tobacco is a really good company for me to invest in because they’ve got a lot of females and a lot of diversity and inclusion going on. And a lot of the work that they’re doing is being pushed in a governance direction and they are trying to clean up their act on the environment and the social side – the governance is dictated that the E and the S. So that’s one example. However, you know, another example would be Tesla, for instance. So Tesla, a lot of people rush into Tesla, because it’s electric cars and all of that. But to me, personally looking at that company, that’s great. But from a macro point of view, the two problems that I’ve got with Tesla are, you know, the fact that the half-life of each battery is 1000 years. So we haven’t really tested such a new comparable, electric cars are such a new thing altogether, we haven’t really considered the environmental impacts of what would what do we do with these battery cells, once they’ve finished being used to they just get put into the landfill? Well, is that arguably worse than burning fossil fuels, we’re yet to see because we’re still at the very beginning of our journey with electric cars, the half-life of each battery is 1000 years, electric cars are such a new thing altogether, we haven’t really considered the environmental impacts of what would what do we do with these battery cells once they finish being used?
Abdul: And if we make everything else equal, how would you rate these three, three factors? We’ve had this question from our community, if you were looking at return, a management fee (or any related fee to a product) and then an ESG scoring – where would you rank that is most important and least important?
Charlie: I think that for me, let’s be honest, returns are very important. There’s no point in putting money into something that you could use to buy a house or do something else with. So whenever I look at an investment or potential investment opportunity, I always look at the opportunity costs, ie me putting my money in into that investment, what else could I do with that money that would return a higher investment? ESG scoring would then come relatively quickly off that because I do want to invest in companies that will be there for the long term. And it has been proven. BlackRock did an incredibly interesting study that got released around April/ May, that showed that high scoring ESG companies had a better return on investment. So the ESG angle does come factor in quite quickly after the return, because I’m thinking ‘okay, so how much of how much does the ESG score affect my return?’ So actually, one leads into the other?
Abdul: Yeah, I think it’s interesting because you’ve mentioned some research that’s been carried out. And I think there’s a couple of financial funding bodies that are doing research more into the ethical side of things. I did see stats by the Journal of Sustainable Finance and Investment and Morningstar Finance Research, which is showing that more businesses that are focusing on ESG scoring have seen an increased return. And perhaps it’s very difficult to say all (ESG) businesses, but they’re seeing a reduced risk in comparison to other companies that aren’t taking an ESG kind of stance to what they’re doing. And I know this would be a very difficult question to answer but like we’ve mentioned throughout this episode, is that there are multiple and seemingly incompatible ESG ratings, how do you kind of sift through the noise? Do you personally have the favourite rating provider?
Charlie: So yeah, I mean, obviously, in the first bit of this, after I gave you a list of all the different providers, and that’s only like a fraction of what’s out there. I think what’s going to be very interesting is to watch how this initiative was taken on by the Big Four accounting firms progresses because if that does come out I think that there’s something very interesting about that is that they are taking in the four metrics, and 34 extended metrics which is quite a lot of different metrics – probably too many for a retail investor, or everyday investor to really consider when they’re making their investment decisions. The ones that I look to the most are the MSCI ones, the Sustainalytics ones. So I think what it is, again, it goes back to the individuals to decide what’s important to you. I look at the ratings because I find it interesting, but I actually tend to look at the company in his own idiosyncratic way, I’m also being driven by my returns profile as well. And ESG is coming in quite quickly after that return profile. So yes, when it comes down to the ratings, I look at them, but I don’t use them as my guide. I then tend to do my own personal research. But the ratings do, they’re quite useful, quite interesting when you dig into the sub-layer of the ratings. So he got, he got G and then they apply different weightings to each one that then leads to your combined score. And again, you could dial up the environmental bit in Europe, because environmental in Europe is very important. Whereas in the States, it’s less important. governance is really important in the states, governance is relatively important but not as important in Europe. So then you’re playing around with the weightings of each one. And as a result, you get very different scores. That’s why I tend to not look at the scores too much, because you could spend hours going in and arguing the toss for why the weightings are each where you’re not actually making any progress on research in the company.
Abdul: I think I think that’s great advice, you do really need to go into depth when researching companies to invest in especially if you are concerned with ESG scoring, and as you said, I think some people may not realise how certain things are more important to them then than others. For some people, a lot of the ethical stance is the main focus, we want to make sure our planet is in a better position for our future, so we want brands that are being more eco friendly. But then, on the other hand, there is a rise in making sure that actually, I want to invest in a company that really supports people from different backgrounds, for example. So yeah, that’s a very interesting conversation. Before we leave, let our audience know where we can find you on social media, which we’ll be posting more on I’m sure.
Charlie: I will be yes. So our company is @mentorxchange so you can find our social media handle. And my personal profile is really not that interesting is mostly pictures of dogs and mountains but if anyone wants to continue this conversation my instagram handle is @Flemingcjm1991. I would be more than happy to pick it up with people if they’ve got other questions.
Abdul: Perfect. Thank you again, and we’ll see you next week.
Charlie: Thank you. ByeTags: abdulasks