Thomson Reuters Lipper – European Alpha Expert Forum 2017

The Thomson Reuters building in Canary Wharf, London.

Ayres Punchard’s Chris Welsford is attending the European Alpha Expert Forum 2017, speaking on a panel titled ‘The Evolution of Ethical Investing to ESG and Beyond’, alongside Andrew Parry from Hermes Investment Management and Trevor Allen from BNP Paribas. This panel will discuss ESG analysis and Ethical Investment – Chris intends to outline his own understanding of the key differences between the two.

ESG (Environmental, Social, Governance) is not the same as Ethical Investment, although the two terms are often wrongly conflated.

E, S, and G are analytical factors which are used to evaluate the quality of companies included in funds – they are signposts to help investment analysts identify how financially sustainable a company is.

Whilst one would expect an Ethical Investment to naturally be subject to an ESG analysis, an investment with an ‘ESG badge’ will not necessarily have been through an ethical screening process.

Ultimately, ‘ESG investment’ is just conventional investment, and should not be put on a pedestal and celebrated as anything out of the ordinary.

Calling an investment fund ‘ESG’ makes it no more remarkable than without that qualifier, and is similar to describing a fund as ‘Quantitative’ – both should be central to the analytical process.

Can you imagine a firm offering an investment on which they haven’t done the quantitative analysis?

It’s unthinkable, and in Ayres Punchard’s view, ESG analysis (a.k.a. qualitative analysis) is just as essential – any Environmental, Social, and Governance factors are likely to affect the risk profile of an investment.

In fact, alongside quantitative analysis, ESG factors should be considered by all investment analysts as part of the standard protocol for the analytical process.

Although these ESG factors influence whether a fund is worth investing in, usually this decision is made on a purely financial basis – the difference when it comes to Ethical Investment is that ethical values will take precedence over financial considerations.

Ethical Investment should allow investors to express their personal views, and influence outcomes by enabling them to put their money where their mouth is and, in some cases, challenge what they view to be the ‘unethical’ behaviour of certain companies.

In a more positive light, Ethical Investment should enable investors to financially support companies which are having a positive influence on the world, and who regularly engage in ‘ethical’ behaviours.

Ethical Investment has to go one step beyond quantitative and ESG analysis, and determine whether or not the investment conforms to a set of ethical criteria that have been determined by the end investor, subject to their personal moral compass.