WHEB Commentary

SRI is not for dummies

Yesterday I spoke at a debate organised by Jamie Harzell, founder of Ethex.  The title of the debate, delivered to a packed room at the back of Eat, Shop, Do in Kings Cross, was ‘SRI is for dummies’.  I, needless to say, had to contest the motion.

Jamie’s idea in proposing the motion was not, in fact, to give sustainable and responsible investing a kick in the head just for the sake of it.  Jamie, who founded the Ethical Property Company, has been at the cutting edge of the SRI movement for years.  But he feels, and I fully agree with him, that certain practices in SRI funds need to be called into question if the industry is to survive and thrive.

Jamie opened the debate with a speech in favour of the motion.  His rhetoric was brilliant and the points he made extremely hard hitting.  The essence of what he said is that socially responsible investment has become so ‘dumbed down’ that it is ‘for dummies’.  He cited the fact that the most popular holding in European SRI funds is BG Group.  He showed that the typical ethical and SRI fund is heavily exposed to banks, telephone companies and even oil and gas companies.  He railed against the fact that it is incredibly hard to find a full list of holdings of any of these funds; most only list the top ten.

His seconder, Louis Brooke, from Move Your Money also delivered some compelling arguments, notably that SRI had done nothing to anticipate or ameliorate the financial crisis, the growing wealth divide or any of the other aspects of a broken financial system.  He also said that SRI funds which hold the likes of British Aerospace in order that they can engage with the company are not engaging in a meaningful manner, but just to have a cosy chat with management and that engagement has had little or no real impact as a driver of change.

In order to respond to the verbal equivalent of a few strong jabs followed by a right upper cut, I had to distinguish between the different types of socially responsible investment.  It was quite true, I said, that a number of SRI funds look very mainstream.  However, the fastest growing part of the SRI market in the last few years has been thematic investment.  This is not just about screening out a few tobacco companies and arms dealers and investing in the rest.  Thematic investing is about identifying some of the most serious crises that face us as a population and investing in those companies which offer innovative solutions to those problems.

I also took issue with the idea that engagement is just a question of ‘cosy chats’.  Over the years I have been involved with some serious and meaningful engagement with company bosses, some of which has been very constructive and led to real change and some of which was far from cosy.  Some of the most robust exchanges have turned out to be the most prescient, including some challenging conversations with BP, HSBC and Barclays during the last decade. Now at WHEB we continue to carry out a meaningful engagement programme, and over the past six months have voted on 196 shareholder resolutions, 15% of which were against company management, usually over the issue of director pay, which in my experience is not the best way to cosy up to company management.  But not all engagement is about confrontation, some of our most effective engagements with company management that have resulted in change have been collaborative with management in the context of being a long-term investor.

I finished by reminding people that SRI is still a fragile movement in its infancy.  By voting for the motion, one would be nipping something important in the bud.  Throwing out the pioneering baby with the slightly corrupted bathwater.  Because of course the battle is so very far from won.  The green economy is still dwarfed by the carbon intensive economy.  Social and environmental degradation continues apace and any attempt to thwart that, however ‘mainstream’ must be better than nothing.  As Yeats put it, ‘The best lack all conviction while the worst are full of passionate intensity.’  Nothing would please those with a vested interest in the status quo more than to hear that the SRI movement had pulled itself apart.

With considerable help from James Vacarro of Triodos Banks, who had the last say against the motion, the motion was defeated.  Although it has to be admitted that a handful of people were convinced by Jamie and Louis’ persuasive arguments.

So I thought it was worth setting out their main objections to SRI, and how WHEB is responding to those:

  • That SRI funds invest in companies which are part of the problem not part of the solution, such as the oil and gas industry;
  • That these funds are not sufficiently transparent about listing all the stocks they own and explaining why;
  • That the fund managers running these funds are paid huge bonuses;
  • That engagement is not meaningful – just a series of cosy chats between City gents and company bosses.

WHEB Asset Management’s position:

  • That we only invest in companies which are providing a positive solution to the world’s most pressing environmental/social problems;
  • That transparency is crucial: we publish a list of all our holdings as well as minutes of our Advisory Committee meetings;
  • WHEB Asset Management is structured as a partnership which means that the key staff are not paid bonuses.  Instead we are incentivised by part ownership in our company.  Our success is therefore directly allied with the long-term performance of our fund and therefore our investors’ interests;
  • That we carry out a meaningful and, again, fully transparent engagement programme (see our engagement report on our website.)

So, in short, SRI is not for dummies as long as it isn’t dumbed down.  Be sure to look under the bonnet of your fund, check the list of holdings, demand to see an engagement report and make sure your fund is in line with your values.

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