Ethical Investment Series #13 – Transcript

Episode details

SUMMARY KEYWORDS

fund, esg, fund managers, green, investment, companies, ethical, client, exclusions, advisors, standards, benchmark, asset, investors, people, deep, shades, big, fossil fuels, engagement

SPEAKERS

Fraser Jack, Elizabeth Hatton, Philip Moffitt, James Harwood, Paul Garner, Alexandra Brown

 

Fraser Jack 

Welcome back to the x y advisor podcast. I’m Fraser Jack and we are halfway through our series on ESG investing or the focus of ESG investing. And today’s episode we’re focusing on the 50 shades of green, which is interesting little topic. So to kick us off, we’ve got Phillip Moffitt, welcome back. Thanks for So tell us about the 50 the 50 shades of green obviously, there’s, there’s lots of different commentary going on around this, you know, the deep green, the light green, the middle road,

 

Philip Moffitt 

I got a big smile on my face greens, my favorite color. So you know, I’m happy to indulge in it. Look, let me start with an example. And try and narrow down go from the example out to the concept. Let’s say we’ve got a mining company that has partaken in poor employment practices and has a high carbon footprint. And we know that we’re going to continue mining for that mineral for whatever reason, is the movement of that company from kind of poor social and environmental output to relatively better nasg positive investment or not. So that’s a lot. That’s what I’d call light green. light green is taking relatively poor quality asset, judging from industry measures, and helping it in its its transition to become a modestly or positive asset. The dark green is the other extreme darker. And as you only engage with businesses that already have this practice in place, understand everything they’re doing, they measure it, they report it, and they comply with every regulation. The practical issue, from my perspective, as a as a asset manager, as an investor, is that the pool of very dark green assets is very small, and the pool of very light green asset is very big. And so in principle, I would be in favor of guided a big pool and try to find the ones that we can make darker green, and help them along their journey, then just only fishing in the dark green pool. But it becomes an issue of personal choice we discussed in the last episode there, there will be some people who are ideologically committed to the dark red bull only. And if that’s the case, then that’s where they should live. And this becomes an interesting conversation then

 

Fraser Jack 

with advisors and their clients, if clients because it’s a bit of an educational process, I guess.

 

Philip Moffitt 

Yeah, absolutely. And you know, you could very easily make the case that I’m going to the light green part of the ball, and I’m going to pick some assets, and I’m going to try and help improve, I don’t actually help improve them very much. And your agreement washer, like what’s a green wash, is it a darker asset that’s actually lighter is that light green asset that doesn’t get as dark as you want. So it becomes a very it’s, it’s amorphous. As much as we would like to say that we’ve got certain standards. And eventually, I personally, I think we’ll eventually end up with accounting standards for these ESG measures, just as we have accounting standards for financial returns. And so when you read a set of accounts, you can be confident that they’ve met certain minimum standards that will be the same for carbon footprint or for social responsibility or so on so forth. We’re a long way away from that. And it’s a ideological question, really, whether you, you want to take the whole and try and make it better, or you only concentrate on what’s already good.

 

Fraser Jack 

So we’re at at the moment, as you mentioned, the benchmarks are a little harder to find. Yeah, tell us about where we’re at in that in that journey of having a sound benchmark and and at the moment who decides on the labels? Who decides what’s light and what’s dark?

 

Philip Moffitt 

Well, firstly, like the benchmarking issue of benchmarking is crew. So it because historically, the way investors have been concerned about let’s, let’s use the word ethical, broadly, ethical issues have approached this, they’ll say I’ve got a certain set of exclusions that I touch, I won’t invest in gambling or armaments, or, or alcohol or whatever it happens to be. So as managers, we’re very used to that. Here’s a part of the universe chop it off, you can’t invest in it. This is much more subtle. This is saying there might be stuff that you don’t touch, I get it. But there’s other stuff that you might want to touch because you think you can improve it and it’s essential, and it’s not necessarily creating social environmental harm to the extent that you can’t live with Because the standards around that are not as clear as just excluding something, it’s like, do I include it or not? And if I included, how do I justify improving it with measurement and so on, then it becomes a individual assertion around how you measure it. And there’s no unifying standard. So that’s where the, that’s where it gets muddy at the moment Fraser in the universe, which is that who says something is ESG compliant or a good sgsn? or bad as Jay said, we’re improving ESG, it’s generally the spruikers of the asset. So that’s either the person who bought it, the person who’s trying to sell it. And you’ve got to think of that party’s advertising. Now, hopefully, there’s truth in advertising. But the truth and Advertising Standards are relatively minimal at the moment. So you know, you really got to chew to diligence.

 

Fraser Jack 

Yep. And globally, is there any, any standards that we can hold our head to

 

Philip Moffitt 

Europe, so much further ahead? In terms of kind of standards that are being applied? Even there? They’re not not universal standards, but there are more understood and acceptable standards, and they’re developing quite, quite quickly, to be honest. Amongst the providers of kind of benchmarks,

 

Fraser Jack 

yep. Where does Australia sit in that in that process? Like, how far away? Are we? Are we sort of just behind Europe or?

 

Philip Moffitt 

No, no, we’re reasonably far behind. In terms of the formality, there are some organizations that are much further ahead than others. You know, I think about you know, for instance, cuvier, the insurance company has a program called premiums for good. And so if you insured with QB, you can elect for a portion of your premium to go into a premium, so good. And it goes into a portfolio that has minimum standards around ESG and green footprint and stuff. So so there are places where you can do that most of the superfunds, for instance, we’ll have a sustainability option, you know, aware super, I’m involved with as a sustainable option that you can elect to go into. But in terms of broadly applicable standards across the board, no. And that does mean that we’re all exposed to some element of less than 50% grain or something of being in the light green end of the spectrum.

 

Fraser Jack 

And and so how do advisors work through that? I guess they’ve just got to try and get a roll of the sleeves and get their hands dirty. And,

 

Philip Moffitt 

yeah, the word I’ve got to try and find the the assets will be asset manager who provide you with something of the standard that your client expects, you know, I would say it’s a lot of conversation with the client base about exactly what they they actually believe in one way investing.

 

Fraser Jack 

Yep. Philip, thanks for being on this episode. Really appreciate it. We’ll catch you in the next episode.

 

Philip Moffitt 

pleasure. Thanks. Thanks for

 

Fraser Jack 

welcome back to this episode, Elizabeth.

 

Elizabeth Hatton 

Thanks for having me, Fraser. Really good to be able to talk to you.

 

Fraser Jack 

Fantastic now, but today, we’re talking about the concept of 50 shades of green with regards to ESG investing, and we’re looking at all sorts of different things around how do we actually work out a bit of a benchmark? How do we actually work out what or how deep these funds are going when they’re starting to look at, you know, deciding what they arrived, what their ratings are? What what are you seeing,

 

Elizabeth Hatton 

there’s a whole lot of ratings agencies out there that rates according to proxy voting on issues of sustainability, these, the Australian Centre for corporate responsibility that looks at sort of governance issues, then there’s carbon metrics, and whether and to what extent companies are moving away from being invested in in dirty industries or activities, there seem to be injuries to the finish. So there’s a whole lot of different factors that are involved. And I find that with clients, they often don’t know what it is that they’re particularly interested in, until you ask them the question and give them some ideas about the sorts of things that they could think about.

 

Fraser Jack 

One of the previous episodes, you mentioned the idea of the leaf rating. Yeah, don’t talk to me about how that works.

 

Elizabeth Hatton 

So the live ratings are put together by a series of advisors from the ethical advisors, cooperatives, and a number of funds and investments are rated to pinion on what it is that the advisor thinks that the average client would think about things. For example, some funds say that they’ve got a certain percentage of capital that can that’s left over from their main asset base that can be allocated to things that are not necessarily deep green, like Coal, for example, that some funds that say that the ethical say that 20% of this type of fund can go to something that is a fossil fuel type activity and some funds so that only 5% of the assets can go to that type of activity. So, often these are because funds can be invested in some of the really, really big companies that are gradually moving away from their exposure to fossil fuels. That 20% is probably more than the average client would be comfortable with. Whereas 5% might be something that they will think that they have to put up with for a while, as long as they have some convictions that the fund manager and or the company’s moving out of that type of investment.

 

Fraser Jack 

Yeah, well, who gets to decide what those percentages are that

 

Elizabeth Hatton 

the percentages, I think that the percentages as decisions made by fund managers and also by companies. And so that’s what sort of shareholder activism and pressure from investors comes in. And if there’s enough emphasis behind what it is that investors are thinking, then a company will need to move, as in the case of Royal Dutch Shell recently,

 

Fraser Jack 

yeah, fantastic. I agree

 

Elizabeth Hatton 

with is this sufficient noise from influential investors or loud investors, possibly both, to make a company change?

 

Fraser Jack 

And I guess there’s a little bit of social media that goes along with those sorts of activism?

 

Elizabeth Hatton 

Possibly, I’m not sure. I’m not really in the social media space,

 

Fraser Jack 

or just media in general, I think the media tends to pick up on these things. If if, you know if a company is to blame for doing something wrong,

 

Elizabeth Hatton 

possibly. But I think that the way that this actually works is there’s a lot of movement behind the scenes, and a lot of talking to companies about what they’re doing. People were actually wanting some transparency about what accompanies undertakings are and how they actually measure up against those undertakings. And I think that there’s a lot of noise and marks on pieces of paper, but not necessarily that companies are moving or any of this stuff. And there’s a recent PricewaterhouseCoopers review, that said that Australian companies are all signed up to all of these changes and making themselves more transferable and accountable with this election. to Australia. Yep. Right. Fair enough. That was about last year. 2021 20. Okay,

 

Fraser Jack 

and so so that’s really the only way to go is to is to look for look for those he said the ethical advisors Co Op, or what was the other one that a

 

Elizabeth Hatton 

responsible investment association of Australia, and they pretty big, they sort of sit what’s regarded as a benchmark in terms of what companies and funds are doing a know what, what funds in in, in super funds are doing well, and they’re regarded as the the leaders in terms of setting these sorts of benchmarks. And that’s the gold standard pretty much for what’s happening in Australia and New Zealand.

 

Fraser Jack 

Okay, fantastic. And so is obviously the DP going well, I feel like the deeper you go, you always gonna find something that’s not quite perfect in the business or company that you can sort of, is there any really, really deep, deep green companies around? I guess, often.

 

Elizabeth Hatton 

There are some deeply green funds. And they’re doing spectacularly well, in terms of their financial returns. They just told this is the wrong expression, but they really are shooting the lights out in terms of their returns, and those companies transparent and also quite particular about which companies they want to invest in. And there’s one fund that I know that a little while ago, decided to divest itself of Facebook, after the Cambridge analytical scandal, and there was quite a lot of kerfuffle in the local press about that saying who they think they are. However, it company policies siege and they look at people’s privacy and human rights as a key issue when they decide which companies are going to be in their fund. And in though, like they have done and they’re continuing to do spectacularly well in terms of their financial returns.

 

Fraser Jack 

Fantastic. Well, thank you so much, Elizabeth, for chatting to us in this episode, we look forward to catching up with you with you again in the next episode, we really start to dive deeper into what is the difference? What are the all the different things in either e, s and G or G, I should say in the next episode. Welcome back to Paul Ghana.

 

Paul Garner 

Thank you very much.

 

Fraser Jack 

Fantastic, thank you for being here. Now, in this episode, we’re talking about 50 shades of green. And specifically, the idea of, you know, who gets to who gets to decide these benchmarks, and you sort of mentioned the the work you’re doing with the co op in the leaf writing, so we might go into a little bit of that. But let’s start with the, you know, the the idea that often fund managers just have a view. And then, and then they promote that view as as you know, as their fund and those things. So talk to us about the 50 shades of green.

 

Paul Garner 

Sure, that’s that whole concept of light green, dark green, is, again, it’s very subjective. And fund managers will make their choices about the balance between what they’re trying to achieve on an ESG level, versus what they’re trying to achieve on a investment return level. So they’ll do that by saying, well, we’ll invest in companies will filter out these companies, as long as five or 10% of the revenue isn’t derived from this particular area of, for instance, mining or, or, or fossil fuels for transport of fossil fuels, those sorts of things. That’s the sort of compromises that a fund manager will make to achieve their desired investment returns. So it’s important as advisors to be aware of that, and I guess not to make judgments, but but to tell them that, okay, we’ll there will be a certain sector of our clients who have no tolerance towards that area, and therefore, this fund for those people won’t be appropriate. And we give them that feedback. And so we say that, okay, well, you make your choices, but this is the feedback from people with an average or deep green people won’t like that lighter green people, you know that that compromise is fine. And it must be a tough job for the fund managers, because they’ve got to make a decision about exactly who they’re going to target. And, and it’s up to us to interpret that, and then be that matchmaker between the individual and their values, and and that fund, and whether that will mix.

 

Fraser Jack 

Yep. Some of the comments. I’ve heard from the fund managers around this, you know, the deep brain versus the medium green. And you mentioned this in the last episode, the influence that money has on businesses and the influence of investor money on it on businesses. And the sort of, there’s a couple of different schools of this one, as you take the money away from them and say, if you want the money back, you have to do X, Y, Zed. And the other you know, the other comments from a lot of fund managers? Well, we can actually provide influence if we have a seat at the table. And we’re actually still invested, but we say we say actively as a as a as an investor that we want to move towards this space. So sort of a couple of schools of thought there, there’s sort of no right or wrong, I guess, when it comes to, as you mentioned, judgments.

 

Paul Garner 

That’s right. And but you can see whether, you know, if they are trying to influence you can see that in the way that they’re walking the talk, that their voting behavior in shareholder meetings, you can, you know, are they voting, according to what they’re saying that they’re trying to influence? So that’s one way we try to hold them to account in that area.

 

Fraser Jack 

And we’ve seen a few Australian companies obviously, in this space go, Well, you know, what we’ll divest and create different spin off arms and you know, put our put our dirty coal or something over there or put out alcohol over there and create a separate business for that.

 

Paul Garner 

Yep. Yeah, was a great example of that. I think more so on the gambling side. Because they’re huge, huge part of the gambling industry.

 

Fraser Jack 

It’s interesting that just because I was sort of saying, well, just because you’ve divested a business, it’s theirs. It hasn’t cut it out, hasn’t stopped it.

 

Paul Garner 

Yeah. Yeah. So it yeah, that I guess there’s a cynical way of looking at it and and another another way, anything. But yeah, it’s a fair um, you can see it started starting to drive behavior, which is kind of good. You know, if you want to avoid that, then it’s make it it’s made it easier for the fund managers. To make those choices, and for us,

 

Fraser Jack 

as well, yes, it’s not exactly a small ship to turn. So talk to us about the leaf rating system, you sort of mentioned that in one of the previous episodes with the with the ethical advisors, co op. And obviously, you know, this is this has had some sort of effect on the fund.

 

Paul Garner 

That will That’s right. We essentially, the process is we examine, or we decide, okay, or we were approached by or we decide this, this fund has got ESG, or, or something of that nature in its title. Let’s, let’s analyze it, let’s see what’s in it, what’s not in it, what their investment philosophy is, what their voting history is, who’s behind it? What’s their track record, all of those sorts of issues, we try to distill into a summary that up to 2020 of us in photon. So our criteria is how would the average ethical investor write this or view this investment? So five ratings would be ideal, down to one which is forget is especially greenwashing. And, and in between, so we all vote on that and and, and then I average it out and and that’s what the writing is, we then feed that back to the fund manager for the comments. And or just to note, if there’s any inaccuracies or new developments that we’re not aware of, and often, and then we’ll we’ll screen that. And then maybe in a year’s time or so the fund manager will ask for a rewriting because that they they’ve taken on the feedback, and they’ve adjusted their processes, and they like us to take another look at it. So it’s, it’s a way of holding the industry do count. And also to make sure that we’re giving them a fair go.

 

Fraser Jack 

Yep. Fantastic. And so that green, that leaf rating, if you like that’s designed for consumers to be able to understand you.

 

Paul Garner 

Yes, it’s it’s, it’s very plain language, it depending on the appetite of the individual to know what’s behind that. It has as much information in there for them to make a decision on how how green vacuform they want their investment to be. Yep. Fantastic. Paul,

 

Fraser Jack 

thank you for coming on and sharing that I encourage everyone to jump on the ethical advisor Co Op and check out the the leaf rating system really appreciate it. Thank you. Welcome back to this episode. Alexandra.

 

Alexandra Brown 

Thank you so much, Fraser, it’s a pleasure to be here,

 

Fraser Jack 

we’re talking about the 50 shades of green, there’s probably not 50. Let’s face it, we’re just using that top that title. But the top two was about the different shades of green.

 

Alexandra Brown 

Sure. So I think you know, when you’re when you’re looking at at a at a fund, the different shades of green, like the first the first temperature test that I do when I’m looking at a fund is I look at their holdings. And I just even look at just the top 10. And if I’m seeing things like fossil fuel or mining companies, if I’m seeing the big banks, the big tech giants, carbon intensive industries, controversial industries, it’s a fair indication that this fund is probably out of the ethical room and certainly not in that deep green, deep green realm. The next thing I would do is look at their responsible investing policy. So does it provide detailed information on their screening process? Does it explicitly state what thresholds they have for inclusions and exclusions? For you know, for an example, if a fund excludes tobacco? Do they have a 0% threshold? Which will probably more on that deep green scale? Or do they have a 10% threshold? Meaning that they can still potentially have supermarket that are selling tobacco in their portfolios? And that might be on the lighter? Green scale? Yep. So I think they’re probably the two but from there, I would probably go onto their voting records. So first, do they have them publicly available? More importantly, are they in aggregate? Or, you know, in other words, all of their funds are in the one voting record? Or can I see the voting specifically for each and every fund, because at the end of the day, if you know, the fund is voting against increased climate disclosure, it’s probably not going to be in that deep green shade. Alternatively, if they are fighting against, you know, resolutions around human rights and those kinds of things, then again, not so deep green and I’ve probably the Also look at engagement. And so whether the fund has a detailed engagement policy, whether they disclose areas engagement that they focus on, do they detail the outcomes of engagement, I think that’s a really big one to show, which is to demonstrate deep green. But this one’s a little bit tricky, because sometimes with engagement, it can happen with a fund and accompany over a number of years before you actually see any tangible outcome. So, you know, it’s not, it’s not a black and white response there for me. But for me, engagement practices are really fast becoming the deciding factor for whether a fund is deep green, whether they’re just talking the talk or whether they’re actually walking the walk, because it gives you a sense of the culture of the fund manager, and whether they take their stewardship role seriously,

 

Fraser Jack 

that is very deep. That’s amazing. Now, obviously, you spend a lot of time doing research, and whilst it rolls off the tongue for you it when I listen to you speak, I think, Jeepers, that sounds like a big role for a financial advisor to get their head around talking to those individual funds and going deep into the voting rights and, and the in the engagement. How do you how do you think, you know, the financial advisor who’s got lots of essays to write and other things to do in their office? spend the time or get that information?

 

Alexandra Brown 

Yeah, I couldn’t agree with you more. I mean, there are there are certainly advisors out there that are doing that, that are in this space. But you know, there’s also outsourcing

 

 

to people like me, who love doing this thing and can give you this the shortened abridged version. Is this what Lt. orem does

 

Alexandra Brown 

know they take they take research that’s around ESG sustainable investing and summarize it, whereas I, I do fund research as a service. So I

 

Fraser Jack 

nice, Okay, very good. Yes,

 

Alexandra Brown 

you might be consulting.

 

Fraser Jack 

And also with the co op, how does the car work in that space with the space?

 

Alexandra Brown 

So with the co op, because of all the greenwashing that was out there, and the difficulty and I guess the opaqueness of investments and the time that it takes to go through all of this, we developed the leaf ratings system. So if you go to the corpse website, and just and have a look at the leaf ratings, we’ve what we’ve done is we’ve taken super funds and investment funds and conducted some research on that. So we look at you know, things like the holdings and engagement and that kind of thing. We look at all those areas, and then the co op votes on the funds from the perspective of their average ethical client. So how would the average ethical client consider the fund to be ethical, and, you know, full disclosure, I am on that leaf readings Working Group, which means I do get to assist with analyzing the funds and producing the research sheets, which are available on on the leaf readings website, which is a great, you know, helpful step. I have to say, though, that I don’t vote on the leaf ratings, because I’m not an advisor. So only advisor members get to vote. But for you listening, if you wanted to check out, you know, the highly rated funds and see what good looks like go to leaf ratings, click on those ones with four and a half star leaves or, or four leaves and use that as a benchmark and compare that with the low scoring funds.

 

Fraser Jack 

Yeah, very interesting. Now, I want to lean into this concept that just because something is not deep green, doesn’t make it bad.

 

 

Yeah. What are your thoughts?

 

 

So are you suggesting that you know, that there’s lots of different shades of green? I, you know, there’s,

 

Alexandra Brown 

there’s definitely shades of green. And, and it’s Yeah, it’s not ongoing. It’s not all bad. And this relates to both companies and funds. So there’s not there’s none that’s 100% ethical, if you look deep enough, you are always going to find something. You know, as an example, let’s look at cochlear. It’s a it’s an Australian company that produces hearing implants and devices. It usually ends up in Australian focus ethical investment funds big because of the positive impact that these implants have on people’s lives. But on the other hand, the cost of these hearing implants is quite high. And unaccessible for for many people, so is this inaccessibility, that’s a negative United States this positive and negative side by side. Another example would be in a fund, they might hold the big four banks, you know, the big four banks and on one hand, we need banks to finance mortgages and business loans and infrastructure that positively affects people and society. But on the other hand, the banks are also financing fossil fuel companies and deforestation and biodiversity, Boston plastic pollution. And you know, so if if a fund holds these banks, is this fund necessarily, you know, deep green or or not green or good or bad or whatever, whatever. You know, I think another question to ask though, is that fund engaging with with companies? You know, are they pushing the banks to reconsider their investment in fossil fuels? And then, of course, that opens the question of,

 

 

is it better to hold the fund because of the engagement? Or is it better to divest? So a whole nother can of worms that you might go into?

 

Fraser Jack 

Yeah, yeah, that’s, that’s pretty much where I was going with that around the fund managers attitude, and whether they do actually influence for positive or whether they do they’re happy to just sort of sit back and and say all, that’s fine, as long as I keep providing returns for the for the for the member. Fantastic. And we’ll probably get up to a little bit more than supply and demand conversation. But I think you answered the question, I was going to ask you who decides with regards to the benchmarking, but you sort of mentioned that with the leaf rating, it’s just the advisors who are in the court that decide that based on what they believe their clients will expect?

 

Alexandra Brown 

Yeah. And I think that that, including the client in this response is the most important thing. So if you were to ask me, you know, who decides what’s ethical for a financial advisor? My answer is actually your client. You know, ideally, that you would have a questionnaire you would uncover, you know, what, what ethical preferences your client has, what ESG matters, issues matter most to them. And, and even better, if you know, the questions coincide with ethical screens on the funds. But you know, for me, what I generally say is that the responsible investment Association have a framework. It’s called the Rhea spectrum. And it outlines all the different responsible investment techniques used in ethical investment products. So from ESG, integration to positive and negative screening, norms based screening, engagement, impact investing. So for me, when looking at what is ethical, I use, this is the ideal framework that I would use. And then how an investment product fits in with this framework. It’s got It’s even got the ABCs, which I just think is only realized this probably a few months ago at the Ria conference, that event refers to the AVC So in other words, how a product A avoids harm, B benefit stakeholders, and C contributes to solution. So the ABCs, so it’s super easy. So I take this framework, this Ria spectrum p defines what an ethical investment product is, or what techniques could be used in an ethical investment product, I would then overlay your client’s values on top of that. And it’s that combination of what’s possible, plus your clients values that determines what’s ethical. And it’s going to be and what is ethical is then unique for every every one of your clients.

 

Fraser Jack 

Yeah, fantastic. Well say Darla, I love that who decides conversation, that it probably takes us a little bit into the next episode, where we start talking about how do we talk to our clients and to prioritizing things. I love the fact that you’ve referenced that spectrum and the ABCs, and people can find it at the Ria website. Really appreciate for joining us this episode. I look forward to chatting in the next episode.

 

Alexandra Brown 

Thanks so much, Fraser.

 

Fraser Jack 

James, thanks for coming back to this episode, we were talking all things around the 50 shades of green. Hi, Fraser, thank you for coming back. Now, look, let’s just let’s get into the concept of the 50 shades of green because because we sort of mentioned I know you’ve mentioned it in previous episodes. In this space, how do we decipher this confusing net of you know, where do we start? Where do we stop? Where do we sit and how to be compared?

 

James Harwood 

Yeah, look, I might talk a little about exclusions, because that’s something that we see a lot of in in ESG investing and, you know, so where do you stop and the probably a great example was engine number one in the US took a position in Exxon Mobil, not because they thought Exxon Mobil was a, an amazing company, but they wanted to influence the behavior of that company to transition away from its fossil fuels business. So they’ve got seats on the board now to really change how that company is, is operating. And the reason I mentioned that is, you know, if you exclude companies like Exxon from your investment criteria, then you don’t have that ability to influence. So what in terms of like the Russell house view, on the whole, you know, we think that having positions in securities allows us to engage to through our voting, through our lobby, lobby groups, etc. We Do you use exclusions as well, so, you know, we have a tobacco exclusion across all of our Russell funds, we also exclude nuclear weapons as a standard as well. But you know, in areas that that are important, like, you know, climate change, and, you know, oil and gas companies, a lot of those companies will be the solution. Yeah, we do need power and energy to, for our economies to operate. So having those holdings in companies is often better than simply excluding to have greater influence, I think that’s, that’s probably a good place to start.

 

Fraser Jack 

So this adds a new dimension, doesn’t it over time, to the, you know, the 50 shades, maybe there’s more than 50. But we’re looking at the concept of saying, Well, is it now is it in the future, and how far down the future and what’s the trajectory, it’s on not just where they are now, and where they’ve been?

 

James Harwood 

Yeah, looking. And there’s also, you know, client requirements, and, you know, their lives. So, you know, we have a number of universities, as clients and their student body are quite influential in terms of how how their investments get determined. And as a result, we, you know, we have launched a separate fund that has harder exclusions around fossil fuels. But that, that doesn’t allow us to have for that particular funds, you know, we can’t really engage with the company. Now, obviously, Russell has many different funds, you know, we’ve got over 400 billion globally, so we still have investments in a lot of these companies. And, you know, it is the best way to to influence behavior. But you know, we do recognize that that approach, isn’t doc green enough for some clients, they want to kind of harder, darker green type of product, and, you know, where we can, you know, we can get sufficient assets to, to launch a product that, then we will certainly do that. And, you know, we recognize that I think that’s the challenge with, with ESG investing, you know, people sit dif, you know, different places along that green spectrum. A lot of products are kind of medium shade of green, to try and cater for the bulk of investors if you like, but we do offer, you know, those harder darker green products for a particular client segments that want harder types of exclusions,

 

Fraser Jack 

when you mentioned this bedroom, I’m imagining the bell curve in this particular scenario where a lot of people are sitting in that middle, and then you have the extremes of each end.

 

James Harwood 

Yeah. Now, I think that’s right. Yeah, we probably would say that the light green is something we we don’t really like to play in, you know, I think we do see products that have quite light green. And I think that that really starts to run into that green washing type of area. So you really want to be in, you know, the medium shade of green, where we have some clear ESG characteristics of our ESG funds, be very clear on you know, what they are in terms of, you know, product labeling and disclosures. Just trying to avoid that that like green weed, because as I say that that’s really, you know, where you are kind of falling into the more greenwash type of product.

 

Fraser Jack 

Yep. It’s good. It’s a good analogy. Now, the, the concept of you know, you mentioned inclusions, or exclusions, and I’m thinking, obviously, that has inclusions, obviously, like we don’t want this the away from type exclusion. Or we do want this, how much did that play a factor? Or is it a bit of both that you really need to? We don’t want this, but we also want a bit of that, like, Is it a push or pull type? decision making?

 

James Harwood 

Question? Now really good question. And, you know, something that we’ve actually seen, probably more recently is the focus on the positive side. So you know, obviously, exclusions are the negative for the negative screens. But how are you reinvesting that money from a positive perspective? So on the whole, we’re, we’re using kind of aggregate ESG scores. So how well a company scores on overall ESG credentials, you start to get into areas of other focus areas, so clients might want? Well, I think I mentioned in a previous session, exposure to batteries or lithium education or health, you know, that these are the kind of typical positive tilts that that you might see in ESG products as well. But yeah, on the whole, most of the Russell products are using what are called aggregate ESG scores so that we can, you know, make sure that the fund is has an overall better ESG characteristic, then then then it’s then it’s investment universe. Yeah.

 

Fraser Jack 

And with that ESG score though, the ESG scores, is it? Is it some sort of benchmark that you use or is it just something that you you use have come up with and how to advisors, I guess compare that to across the market? Yeah, look,

 

James Harwood 

I think it’s actually quite a confusing area. I did a piece on this a couple of months ago, because, you know, certainly one. There’s there’s been quite a lot of academic studies on this that shows the different ESG scores vary quite a lot between providers. So what we do, we use our own proprietary metrics. We’re using something called the Salisbury or the sustainability Accounting Standards Board. So so they have a materiality map. So just focusing on the financial materiality of the VSG by sector, so you know, what’s important to bank on how well x scores from an ESG perspective is going to be different to what’s important for some someone like bhp. But but but this this says B map is it’s a it’s a good independent source to determine what characteristics we should be focusing on it. And it really, really becomes quite concentrated. So some of the old ESG scoring has been too generic. What we’re focusing on is financial materiality, and that that that should lead to to investment performance. Okay, fantastic. Yeah. So that I’ll have to dig up the CSB map, but I feel like it’s got a fairly decent accounting standard behind that, that you can sort of benchmark off and it’s definitely freely available to download off their website. So

 

Fraser Jack 

yeah, fantastic, James. Thanks for coming on this episode, the 50 shades of green and clearing up a little bit of stuff for us. In the next episode, we’re going to dive deeper into what was behind all the E is energy and how to how do we prioritize those inclined conversations to look forward to chatting you in that episode?

 

James Harwood 

Thanks, Fraser.