Excluding particular sectors is not the aim of ESG investing, Hargreaves Lansdown has said.
The asset manager has argued that instead all investment strategies benefit from considering environmental, social and governance factors.
In its view, a “best in class approach” can preserve diversification while “keeping one eye on the future”.
“All investors should be incorporating ESG factors into their analysis whether they consider themselves a green crusader or not,” Laura Hoy, an ESG analyst at the firm said.
Hoy noted that ESG investing “comes with its fair share of challenges” and highlighted confusing terminology and the potential for greenwashing, but she said despite these challenges, rejecting ESG in its entirety would be the wrong approach.
“Saying ESG should be ignored is akin to telling investors to disregard conventional metrics like price to earnings or free cash flow,” Hoy said.
“Investors incorporating ESG considerations are simply keeping their eyes open to the trends influencing regulatory decisions, government policy, and public perception,” she added.
Hoy argued that using ESG metrics are a good way to identify sustainable businesses but that like any other data point, are best used to compare “apples with apples”.
Hoy used the example that oil and gas stocks and those in the tech industry cannot be compared on a price to earnings basis and said ESG metrics work the same way.
In her view, using ESG in this way should help investors preserve diversification without ignoring underlying shifts in public policy and perception.
“Tesla’s a great example of how ESG ratings can uncover opportunities and threats within a particular company,” Hoy said.
“Years ago, Tesla’s commitment to electric meant its ESG credentials outshined most peers. This reflected the group’s decision to jump on the EV revolution early. But now that peers have caught up, the group’s sunk to the bottom of the pack.
“Social and governance issues are now weighing on the group’s ESG credentials. Concerns about working conditions, metals mining and governance issues mean failings in the E, the S and the G. These are all risks that should be carefully considered before investing.”
Hargreaves Lansdown stressed that ESG is about more than climate change and noted that social and governance issues are often overlooked, but can play an important role in company performance.
Divestment or shareholder activism
The debate around whether divestment or shareholder activism is the most effective approach to holding a company accountable is one that has waged on for years.
Some in the industry believe direct engagement and the threat of divestment is a far stronger tool than boycotting when it comes to climate change in particular.
Others, like the campaign group ‘Just Stop Oil’ take the view that because of the scale and speed of climate breakdown, shareholder engagement alone will not work.
Elsewhere, Hargreaves Lansdown told the business, energy and industrial strategy committee earlier this month that ESG reporting and ratings need to be standardised and enforced properly to help consumers and investors understand the sustainability credentials of companies and investment products.
