CB: Well, Mike, this is certainly going to be interesting, as today you’ll be wearing your adviser hat more than anything. I suppose for context I should explain that as well as being our MD here at Screening, you’re also a director at our sister company Ethical Investors, which is a financial advice firm.
MH: I certainly will, and I am indeed.
CB: We’ve wrapped that up nice and quickly, haven’t we? Let’s just jump straight in - today I thought we’d address why you often describe negative screening as, and I quote: “old but gold”.
MH: Ah yes, I knew this one would come back to haunt me. Well, I say “old” because negative screening and avoidance was one of the first forms of what I suppose would now fall under the umbrella of responsible investment, and I say “gold” because it works, and because it’s still popular in spite of the growth in ESG and impact investing.
CB: Well that certainly makes sense as a phrase then, but why do you think it’s still a popular approach, if things have moved on a lot since the early days?
MH: I think it’s because more people are becoming increasingly aware of what they do and do not want their money linked to. Then there’s also the fact that people seem to care about more things when it comes to money, compared to when we started back in the ‘80s.
CB: Go on?
MH: So ethical investing was, and still is I should add, very much a case of no cigs, bombs, and booze, but people ask about more than that now. When I started there was virtually no environmental screening, DEI, palm oil, online safety, biodiversity, etc. I also can’t help but wonder where we might find ourselves if we had been more mindful at that time, and had done something about these things.
CB: What about the issue of weapons? Is that evolving at all as a topic?
MH: A little bit, I’d say. It’s still a solid “no” for a lot of people, but the number of discussions regarding whether or not we should be investing more in arms companies has skyrocketed since Russia decided it was a good idea to invade Ukraine.
CB: Is that because views are changing, what with events like Ukraine?
MH: To a degree, yeah. Some are arguing that perhaps guns and tanks are not always such a bad thing, and for some it’s not necessarily weapons that are a problem, it’s who has access to them.
CB: How does that translate into the investment process? Are the likes of fund providers now conducting screening to see how weapons are being used?
MH: Exactly that. There’s some demand for products which still allow for investment in arms companies, provided they aren’t selling to what are often dubbed as oppressive regimes. We’ve seen it become a major issue for a lot of people over the past year or so, what with the... situation in a certain part of the Middle East.
CB: I can’t say I’m not surprised, given how much awareness there is of that “situation” in particular, especially due to social media. Which, I suppose, leads back quite nicely to your first point really, about people being more aware of what they don’t want their investments linked to?
MH: It certainly does. Isn’t it almost like I did that on purpose? It all comes down to things like social media as you say, and campaigns by animal rights groups, human rights groups, and the like. Awareness of issues is only going up, and some groups are even running campaigns addressing the fact that people’s money can be supporting certain activities, which is making people ask about how their money is being invested.
CB: Which I assume is also making more people want to address how their money is invested, and not just know?
MH: It certainly is, which is great to see. People can sometimes forget how much individual investors can force change, when their collective voices are loud enough.
CB: Now, another thing you’ve mentioned before is your belief that, for all it’s good qualities, ESG will never replace negative screening as an approach to responsible investing. Shall we touch on that?
MH: Definitely, and in short, it’s because ESG is a risk tool, whether it’s about managing risks that companies face or the risks they pose. ESG absolutely has its place, but for a lot of individuals that come to us at Ethical Investors, they just want to know that they’re not supporting companies that go against what they believe.
CB: Do you think the two approaches can complement each other in any way?
MH: Oh absolutely - ESG data can feed into exclusions, much like what we do here at Screening. If you take fund providers, for example, it can help them to avoid companies where there are serious concerns regarding their environmental impacts, or companies deemed to have inadequate risk mitigation measures in place.
CB: Which could make said fund a suitable choice for managers to include in an MPS aimed at investors with strong views on the environment?
MH: It certainly could. As I said earlier, there was virtually no environmental screening when I started in the field, or interest in things like online safety. ESG can help in looking at these issues, but it still often comes back to the case of “avoid or not”?
CB: Which makes sense, seen as certain issues like environmental impacts are more nuanced.
MH: Exactly, whereas other issues like tobacco don’t need something like ESG to inform the approach. After all, a company either makes money from the sale of tobacco, or it doesn’t. For most investors looking for ethical investments, they don’t really care if a tobacco company is implementing community measures, or how good its responsible marketing policy is. If they’re selling cigs, then it’s a no.
CB: Am I right in thinking that ethical, sustainable, etc. funds and models exclude things like tobacco as a general rule?
MH: You are. It’s a standard expectation of ethical funds and models as you say, as are other issues, which is why negative screening is still an important service to provide. Funds can select equities using really quite advanced ESG or even impact measures, but MPS providers and managers still expect these sorts of funds to include a negative screening element.
CB: Well, I think that pretty much explains what you mean by “old but gold”, don’t you think?
MH: I do. I can talk about this for hours, but I think now’s as good a time as any to stop - Rolo is waiting for me at the seaside!