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Navigating the ESG wave: A conversation on Investments, Risk and the Future with Dr James Clunie.

Updated: Nov 19, 2023

In recent years, the surge in popularity of Environmental, social, and Governance (ESG) businesses has become a focal point in both societal and investment conversations. We are lucky to be joined by Dr James Clunie, who has kindly given his thoughts on how to navigate the ESG wave. We explore the societal shift to ESG, considerations for ESG investing, and how you can invest sustainably with a limited amount of capital. I hope you enjoy!

 

Introductions

Before we start, I'd like to formally introduce our first guest on The EcoJournal. Dr James Clunie is an 'Investor at heart' with a specialisation in short selling and stock lending. Currently a Director for 'Long Short Consulting ltd', his past roles include; Head of Asset Allocation at Murray Johnston International, Head of Global Equities at Aberdeen Asset Management, and an Investment Manager at Jupiter Fund Management. On top of his illustrious career in finance, Dr Clunie is also an honorary professor at The University of Edinburgh, which was where our paths met!


 

ESG and the Changing Landscape of Investment


Our conversation began with a reflection on the societal shift towards sustainable practices, such as a companies environmental impact, social impact, governance, stewardship and sustainability. Dr Clunie expressed confidence in the continued scrutiny of a companies ESG impacts, highlighting the latter 5 topics as important measurements for sustainability. He notes " We might not always understand the answers (and some firms will obfuscate and tell narratives that suit there own incentives) but interest in these topics will persist"

"Investment that takes regard of ESG issues is surely just risk-aware investing" Dr James Clunie

I particularly like this response from Dr Clunie as it seemed to simplify and cancel out a lot of the noise around ESG investing. My take on this quote is as follows; It would seem that the risk of an investment would increase (in the long run) if the security you're investing in, doesn't have solid ESG principles. You could subsequently argue that sustainability will become a pillar in the structure of our future economy, so it would make sense that investments which don't take ESG into account would become more risky.


I look back to a guest lecture by Russel Napier at the beginning of my postgraduate studies, where he brushed upon the idea that; the underlying rules of an economy change roughly every 30 years. If we reflect back to the economic climate 30 years ago, what has changed? My answer is the growing inclusion of ESG. I'd love to hear about your thoughts in the comments!

If we look at this graph on the 'Number of ESG Regulations', it becomes very clear that the governments are also paying close attention to the growth of ESG! This arguably signifies a growing importance of ESG as it becomes a pillar of our economy.


source (Drie, et al, 2019)

 

Investor Theory - What to think about when considering an investment


Our conversation moved towards the basis for a good investment within ESG. Dr Clunie stresses the importance for investors and regulators to "pay heed to the theory and empirical evidence around investing. This includes the theoretical impact on expected risk-adjusted returns from constraining one's universe of investments; and the importance of ESG changes (as opposed to levels) for returns".


He goes on to say - "as an active investor, I do think it's important to examine the business model of a firm. If a firm is operating in a growing field, but will need several infusions of capital to keep operating for the next few years, it is actually fragile"


ESG based companies have a lot of external help, with government grants, tax breaks and less regulatory pressure. Dr Clunie notes that "If the era of near-zero interest rates has ended and we're in a more 'normalised' era, this has implications for funding, investment and growth. Governments can get involved, with subsidies, the pricing of externalities, or even offering contracts to firms". Such intervention from governments can 'prop up' small businesses to an extent, however we can't allow these processes to cloud our judgement. We must also look at cost of government intervention and initiatives, as Dr Clunie proclaims "these actions have costs that taxpayers/ society must bear".

Companies with positive intentions fail all the time. Dr Clunie mentions that "'Failure' is a necessary part of overall economic activity, and so should not be feared too much. Without failure, we can end up with a brittle, zombified world of businesses. If entrepreneurs set up firms that aim to solve problems, and these fail from time to time, that's probably OK"

"from a societal perspective, ESG matters. From an investing perspective, we should be grounded by theory and evidence" Dr James Clunie

Navigating around new and exciting startups and initiatives is very difficult even for the most prudent investors. The ESG startup market could arguably be harder to identify sound investments, with each new initiative promising positive ESG change. Dr Clunie reminds us to be grounded in our investment processes and do our due diligence as we would any other investment.

 

A look into the Future


How do you see the ESG market developing over the long run?


"I don't think I've got a better vision of the future than anyone else, but I do think that many investment analysts will be considering ESG issues as a routine part of their work, if only from a risk assessment perspective. Some events in this domain fascinate me: one is the seemingly bitter politicisation of ESG investing - from opposing sides - in parts of the USA. Another is the interaction between different types of investor around ESG issues: index fund managers, active managers and even short-sellers. Who knows where it might lead?"


Finally, how could retail investors with a small amount of investible capital include ESG-based investments in their portfolio?


"With a small amount of capital, it is likely that one will be investing via funds. There are many ESG investing funds, and these may invest in equities, bonds or alternative assets (such as energy projects) - please do your own research and look beyond the fund's press release. See how the investment process takes account of the theory and evidence on ESG investing that we discussed earlier. And consider your own time horizon, liquidity needs and ability to bear losses."

 

The Bottom Line


Dr James Clunie has provided invaluable insights into the multifaceted world of ESG investments, urging investors to strike a balance with the needs of a sustainable society and sound investment practices. The future of ESG remains uncertain, but one thing is clear: thoughtful consideration and due diligence will be integral to navigating this landscape successfully.










Full Graph Source:

Drei, Angelo & Le Guenedal, Theo & Lepetit, Frederic & Mortier, Vincent & Roncalli, Thierry & Sekine, Takaya. (2019). ESG Investing in Recent Years: New Insights from Old Challenges. SSRN Electronic Journal. 10.2139/ssrn.3683469. )



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