According to Ethical Futures partner Julian Parrot, claims of engagement with big polluters can only go so far to attract investors.
Parrot tells ESG clarity how he sees the possibility of much more patient capital for ethical clients and questions the legitimacy of much of what is now classified as impact investing.
What was the sustainable finance market like when you entered it 20 years ago and how has your approach evolved since then?
When I launched a balanced portfolio, there was a UK equity fund and an international fund. There wasn’t even a fixed interest investment option. It took until about the early to mid-2000s for more than one corporate bond fund to hit the market.
We used to be pretty negatively focused on what we did and used [research charity] Eiris. There was a nice spreadsheet where you could enter all your answers and get a background reading of who did what.
We used to select primarily on that basis, but I became increasingly dissatisfied with that as a way of trying to create a portfolio for clients. So we moved away from that around 2009/10.
And we also changed from trying to be stock pickers to individual advisors because we were creating these random sets of semi-custom portfolios. We had worked a lot with Rathbone Greenbank but we started looking for something that was [more suitable to] serve a wider range of customers.
However, since day one, we haven’t done any mainstream advice. Other people can do it – we’re not interested.
How do you see your role in terms of stock picking?
I was lucky enough to be consulted by Parmenion when he was starting out because he was looking to relaunch what he then had as an ethical portfolio. In fact, I helped him build, or he helped me build, my decentralized investment process. And then I ended up watching him.
It was really insightful to work with a discretionary manager and understand how they do their due diligence on funds from an investment perspective. And that convinced me that I was more of a planner than an investment manager.
[For clients with less wealth] we use multi-asset funds, so we do a lot of research on that. In fact, we probably do more research than before, as we now do due diligence on discretionary managers looking at styles, approaches and all the financial aspects of what they do.
How do you communicate investor engagement to clients?
They don’t really think about the power of money and I think that’s the most exciting thing – this empowerment of funds.
If you’re going to empower funds, you need managers who have the ability to do so or at least managers who understand where their ability to engage with an issuing company lies.
[When you explain how managers can effect change through engagement] you see it in the customers’ eyes, you see them say, “Oh, yeah, I hadn’t thought of it that way.”
I explain things to clients in small chunks and always have a few examples up my sleeve to illustrate things.
There are duller moments of engagement [and]… some of them are a little harder to communicate, like board diversity.
Where do you see the main incongruities between clients and asset managers?
Probably the biggest area right now is… around banks and fossil fuels.
There are a lot of good arguments that banks oil the wheels of the economy and…many banks can be quite benign in what they do. But I think the whole space of the fossil fuel extension is an area of tension with what our customers are looking at and what they want from the funds.
I don’t think a lot of managers really get that – there’s always a kind of, “Well, we can engage with them and encourage them to change.” But if you have a big stake in the Canadian oil sands or something, it’s hard to reverse.
[Also, clients] sometimes come to us with relatively uninvestable aspects. Apart from loans, it is difficult to invest in social enterprise because social enterprise, by definition, does not give you the opportunity to extract value.
We… get involved a bit in giving clients advice on building the grassroots economy – working with the likes of Ethex and Abundance to come up with more community-based methods. Fund managers never really do that.
We have used Schroeder Big Society Capital Social Impact Trust for some clients. I think patient capital is an interesting space that would be very popular with customers.
What does greenwashing look like these days?
My main concerns relate to impact and alignment with the United Nations Sustainable Development Goals (SDGs). I see a lot of impact as ancient, positive, ethical. You just have to invest in the water company, the renewable energy company, the transport company or whatever. I am not 100% convinced that there is additionality in what is happening there.
[The SDGs] were designed to encourage private money to create additional funds to support government policy. They weren’t designed to put pretty pictures on standard international global equity funds and say, “Oh look, we’re aligned with this.”
I am [also] concerned about greenwashing that’s yet to come, in terms of how things like disclosures – data providers’ data points – are still not strong enough. It is very large cap oriented. So you present portfolios based on data from 60% of the market. You are standing on a higher level than is actually the case. And [there are] good funds that may be interested in smaller-cap, less-disclosed companies, but are probably doing something a little better. I don’t know how you square that circle.
|Preferred DFMs for Ethical Investing||Parmenion
Rathbone Green Bank
Tribe Impact Capital
|Example of a sustainable portfolio
(medium/balanced risk, medium term
five to 15 years, extended ethical responsibility)
Gilts (including indexing link): 15%
Global/Sovereign Bonds: 5%
Corporate bond: 15%
Alternative (infrastructure/property): 10%
UK equities: 22.5%
International Equities: 22.5%
Global Emerging Markets: 7%
|Percentage of sustainable assets advised||100%|