In recent years, demand for ESG (Environmental, Social and Governance) and responsible investments has grown rapidly.
Investors have differing ESG and responsible preferences; some investors want to invest to combat climate change, whilst others favour companies offering healthcare solutions or environmental clean-up. As a result, investment companies are beginning to offer more specific ESG funds, such as clean tech funds, green infrastructure funds and biotech funds. This specialisation is great for the ESG market as a whole, as it makes investing attractive to a wider range of investors and it increases efficiency.
However, perhaps because of this specialisation, many firms seem to be ignoring the G of ESG i.e., Governance. Issues relating to governance include diversity, treatment of the workforce and independence of directors. Good governance is often an indicator of a sustainable business model – companies with a diverse workforce have a greater chance of innovating and understanding their customers, whilst good staff relations promotes loyalty. Every business needs a critical friend, and independent directors fill this role.
Whilst there are a vast number of funds that focus on clean energy, healthcare, clean water and other themes that fall under the social and environmental categories, there are very few that specifically target governance. Many funds argue that they cover the G in funds that target social and environmental solutions, but it’s easier to talk the talk than to walk the walk.
An example of a fund that includes the G for Governance is the ‘Fidelity Women’s Leadership Fund’. The fund invests in companies which advance women’s leadership, and which include women in key roles. It is interesting to observe which names aren’t included – big companies like Apple, Amazon, Alphabet (Google) and Facebook, which feature heavily in many ESG and responsible funds are notable by their absence – evidence that Governance is not being taken seriously by some fund managers.
It may be that investment houses themselves aren’t taking governance seriously, and that may be the reason why there is a lack of governance specific investment solutions. A recent report completed by Citywire showed that, in 2020, there were 16,353 fund managers; however, just 1,932 of them were female (11.8%). Meanwhile, 145 funds are run by a female or female only team, whilst 9,079 are run by a male or male only team.
It is clear then that fund houses themselves are falling behind on the G, so it is not surprising that the solutions that they are offering mirror this issue. Fund management companies which don’t understand the importance of good Governance might struggle to understand their customers, retain good staff or receive constructive criticism. For this reason, investors seeking responsible investments might be well advised to consider how the companies offering them are rated for Governance.