Part of our series of retrospective blogs celebrating IFA Magazine’s ten year anniversary. Abdulaziz Alnaim, CFA, Managing Director at Mayar Capital, reflects on how the past decade has seen the investment community pay increasing attention to the climate threat. Looking forward, Abdulaziz predicts that we will see regulators define the parameters of ‘Responsible’, or ESG, investing.
“10 years ago, the idea of being a ‘Responsible’ global equity investor was something of an oddity. The prevailing mainstream belief of the investment community was the Friedman doctrine. Namely, that the goal of any executive is maximise returns to shareholders while conforming to the basic rules of society. If shareholders wanted to do some good in the world, they could do so by using the funds generated by maximising returns to whichever social initiative is close to their heart. The idea of corporate social responsibility was at the periphery of asset manager’s concerns. The narrow range of products that did cater to those who wanted ethical considerations on their investment decisions were invariably a subset of the standard portfolio with a subset of the alpha to match. The use of ethical ‘overlays’ stripping out parts of the ‘main’ portfolio. In those early days, we often found ourselves trying to combat the idea that the price of doing good was lower returns. The Mayar approach has always been to incorporate ethical concerns into the process, building a responsible portfolio from the ground up. This approach is increasingly being adopted as those ethical concerns are now recognised as risk factors that require scrutiny.
“Individual savers are now increasingly aware of the impact their investors can make. Mayar believe that the climate crisis is the greatest long-term threat to humanity. We owe it to our children and grandchildren to act quickly and decisively. In equity investing, the theory is on solid ground. Increasing amounts of capital allocated to companies which demonstrate best in class ESG business practice will see their cost of capital reduced. In turn, this incentivises other companies to operate with consideration to ESG issues, in a race to the top on standards. ESG investing can also help spark innovation that reduces carbon emissions (and therefore costs!).
“In the coming years, we expect the focus of regulators to be defining what ‘Responsible’ investing is. Regulators are navigating a difficult course in being able to monitor self-proclaimed ESG Funds. This is particularly relevant for providers offering both an ESG and a non-ESG strategy. However well intentioned, attempts to introduce frameworks around reporting and externally available ESG indicators have met with criticism. By creating specific areas of importance, rather than incentivising genuine change, it can have the reverse effect. Companies may begin concentrate on emphasising their ESG credentials by conforming to the reporting standards, leading to justified charges of ‘Greenwashing’. We caution against the reliance on simple labels to make investment decisions. Labels such as ESG can and will mean different things to different people. For example, should one avoid extractive industries entirely or can investors help companies transition to a new, cleaner economy? The industry will also have to adapt to the internal contradictions of their own ESG policies. Mayar made the decision to avoid extractive industries through a combination of both environmental and ethical concerns but we are also cognisant that one of the biggest challenges to implementing wind and solar energy and manufacturing and Electric Vehicles is the shortage in mining certain minerals like Nickel. Rather than relying on catch-all labels for what constitutes responsible investing, each individual will have to come to that conclusion independently.”