Those of you familiar with our Responsible Investment policy can probably guess our view on this one. We do not consider this to be a valid Responsible Investing argument, for the simple reason that it’s not an ‘investment argument’. It is not the role of investors to dictate what people should or shouldn’t do. Moreover, an investor who doesn’t buy, or for that matter buys, stocks of a company does not impact consumers’ preference for the products and services of that company. Nor does for instance buying and passively holding stocks impact the production decisions or other strategic choices made by that company.

Comparably, outside the equity space: buying commodity futures doesn’t automatically impact the demand for, or production of the commodity concerned, such as wheat, coffee, copper or oil. Nor does it automatically have an impact on how these commodities will be produced, including the important environmental and social aspects of such production.

Going back to the automotive argument: we do recognize that applying such an exclusion policy seems to meet some investor requests for a more sustainable way of investing their money. However, we believe that applying such a policy in the end only checks a box rather than that it effectively contributes to achieving ESG goals. When the consequence is that the ownership of companies – and therefore the ability to bring about change – transfers from those who care to those who don’t, they will be counterproductive.

Investors definitely have impact, also from an ESG point of view. But that impact is sometimes not so straightforward. To have a positive impact in our view requires an active approach. And such an active approach includes engagement together with well-considered market impact.

Essentially, in this argument the misplaced ‘should’ from Argument 1 has been replaced by ‘will’. We consider this to be a good example of incorporating an ESG argument (i.e. the Environment) in the investment process. Arguments against often boil down to: “investment managers only do so because they want to make money!”. But does an argument only count as a valid ESG argument when it is at odds with sound economic arguments? We don’t think so. The willingness to (potentially) lose money may be one of the key roles of investors, but we will not make an investment when we expect to lose money on it, even when it seems to contribute to certain ESG goals. Such investments do not fit with our fiduciary duty. Investment management should not be confused with charity.

However, we strongly believe that – surely in the long run – ESG arguments and economic arguments align. In the shorter run that might not always seem to be the case. But short-term interests aren’t leading in the choices we make. If the hypothetical investment manager’s argument would have been: “We expect that Wirecard will continue to be successful with committing fraud and getting away with it. For that reason, we will buy and hold its stock”, we would neither call this a valid ESG argument nor a valid Responsible Investing argument. The recent developments at Wirecard illustrate how Responsible Investing and longer-term economic arguments go hand in hand. It’s all about sustainable returns.

Crucial in calling Argument 2 a valid Responsible Investing argument is the phrase ‘would rather buy’. In our view, buying something above its reasonable economic value never qualifies as a responsible investment. Admittedly, different investors and different investment managers will likely have a different view on the actual reasonable economic value of something. This is even necessary for markets to function properly. But if investors continue to buy above what they themselves regard as the reasonable economic value, yet another bubble is in the making. We fear this is not just a hypothetical risk. Poorly implemented ESG goals will likely lead to investment managers buying and holding ‘clean’ stocks at price levels way above their reasonable value if selling such stocks does not fit their investment guidelines. Bubbles don’t support sustainability goals. Bubbles burst.

We believe that exclusion policies at first glance may seem to contribute to sustainability goals, but we fear that in the end they will prove to be counterproductive. Surely when applied outside the long-term long-only equity space. And even more so when based on some form of standardized ESG rating. Such exclusion policies are a perfect excuse for investment managers to not have to explain the choices they make in their investment process.

We believe that making choices, and the ability and willingness to explaining those choices, are the key elements of Responsible Investing. This forms the basis of our Responsible Investing framework. In every step of the investment process conscious choices have to be made, taking into account:

1. The role of the underlying asset (financial instrument, commodity, company, etcetera) in society.
2. The role of the market for (derivatives on) those assets.
3. The particular investor’s role in that market.

This will probably result in different choices made by different market participants. Which is only healthy. Different participants fulfill different roles, in society as well as in the market. And just as important, different people have different beliefs. We should embrace this diversity. A healthy adaptive society requires that people can, and do, act upon their own beliefs.