Oak Four, and other financial advisers who take a similar approach to portfolio management, follow an evidence-based approach to investing our clients’ assets.
It used to be called ‘passive investing’ because the basic principle, once your portfolio had been designed with a view to meeting your personal goals and constructed to match your appetite for risk, was effectively, ‘let the markets do the heavy lifting; relax and capture the rewards.’
Increasingly, for many of our clients – and especially the younger members of their families who will benefit from their investments in the long run – meeting personal goals is not enough.
They are concerned about environmental and social impact issues, like climate change, gender equality, human rights, ethical supply chains and fair treatment of the workforce.
They don’t want to prop up businesses whose record in these areas falls short of acceptable standards. But they still want to take an evidence-based approach to capture the returns of the market and meet their goals.
Is that asking for the impossible?
Evidence-based investing changes when the evidence changes
As much as half the world’s fossil fuel assets could be worthless within 15 years as part of the global shift to green energy. And around 13.5% of the world’s publicly-listed C02 emitting companies is owned by BlackRock and Vanguard, the two biggest fund houses, the majority of whose assets are passively managed.
Capturing all the market obviously involves capturing the returns of some businesses whose values you may disagree with, such as fossil fuel companies.
That’s not the full story, though. Evidence-based investors don’t ignore evidence. But we also build portfolios to deliver in the long term, which implies buying assets that are going to perform well over 30 years or more.
But renewables have only been part of the market for a decade or so. So their impact on an evidence-based portfolio is more muted than it would be with an active approach.
But with every sector in every economy set to become greener in the next four decades, and renewables outperforming fossil fuels for more than ten years – which is straying into the territory of ‘long term’ by anyone’s reckoning – their weight in global indexes is only set to increase, along with the space they occupy in your portfolio.
Having your cake and eating it
Can you invest consciously and passively? To a certain extent, yes.
The way we do it at Oak Four is to remain evidence-based – we’ll always use the data to build diversified portfolios that keep costs down. But for clients for whom sustainability is a key consideration, we use funds that tilt their investments towards companies that take Environmental, Social and Governance (ESG) factors into account, and away from companies that don’t.
You can go further, of course, and actively choose only companies who meet stringent ESG criteria – but at present, that would skew away from an evidence-based approach to investing.
The choice isn’t always as easy as it might seem. Some long-standing fossil fuel companies are amongst the biggest investors in renewable energy. BP, for example, is set to spend over $60 billion on renewables in the next 10 years. As an investor in BP, your money could accelerate that progress.
It’s not just a financial return – you own the companies you invest in and can influence the way they are run. And in the long term, they will change the shape and direction of the market itself.
The market is changing
With global ESG assets set to exceed $53 trillion by 2025 – over one-third of total assets under management (AUM), they’re going to make up a bigger proportion of the market every year.
53 of the biggest names in the investment business, with $7 trillion AUM, are funding the Workforce Disclosure Initiative (WDI) – an organisation that questions quoted companies for hard data on 13 themes, from corporate governance to diversity & inclusion and supply chain management, and publishes the results.
It’s not a feel-good, nice-to-know initiative. Investment houses fund it because they want the data to inform where they place their assets, because it’s what their clients are asking for.
We are getting there, as an article late last year in the Mail On Sunday noted:
“The industry is …undergoing dramatic transformation. Companies are getting better at reporting their credentials; fund managers are getting better at asking the right questions; and indices are being honed. In time, the landscape should be much easier for investors to navigate.”
