How (the hell) do I divest from fossil fuels, and a sorry cautionary tale

MSCI’s Emerging Market ESG Leaders Index outperforms the base index, but still contains questionable stocks.

A friend just asked me on Facebook:

How would you advise people to handle disinvestment with their financial advisors in terms of the funds they are invested in? Would it be a simple “switch all funds out of fossil fuels”…something like that?

Quick answer…

If you want to see truly ethical and responsible investment funds created in SA, please sign up here.

It really isn’t simple to divest from climate-killing corporates in SA. Not yet. We want to make it a lot simpler. For it to be simple, we have to push asset managers (like Allan Gray and Coronation and the rest) to create fossil fuel-free funds, and they won’t do this unless they see a market for such funds and/or feel public pressure to create them (as they should, because they know the risks better than the market). We need your help to show that there is a market, and to create that public pressure. Sign up here, so we can contact you when we write combined letters to asset managers and demand meetings with them.

Our plan

Over the next few months, we plan to:

  1. Canvas asset managers in detail on how actively they are seeking to ensure that there will still be an economy for your capital to live in as climate breakdown advances. That is, ask for details of their climate and responsible investment policies.
  2. Write joint letters to these asset managers, signed by current clients including you, asking for fossil fuel-free funds.
  3. Seek meetings with their chief executives to press this case even harder.
  4. Provide regular updates on the progress of this process to the media.

Longer answer…

I’m SO glad you asked. Yes, do push your financial adviser on this matter, because they need to hear this issue raised (template letters to help, here). But they almost certainly won’t have an answer for you, because there are NO off-the-shelf investment products in SA that yet meet this need.

WWF/Prescient have a Living Planet Fund that came close, but then, bizarrely, they went and invested in BHP Billiton, so we’ve had to stop suggesting it. And now we have to stop suggesting another option… read down.

The fact is the options for anyone without a bespoke share portfolio are slender. It really is not simple… yet. Not in South Africa… it’s easier in other countries with established investment traditions, where you can just look for and switch to an ethical asset manager or pension fund providers. We’re trying, as Fossil Free SA, to muster some people power on this issue to start influencing both asset managers and pension funds. (The latter is tricky because pension fund trustees are not answerable to members, but are legally obliged to exercise independent discretion. They have to be persuaded, not pushed.)

A sorry cautionary tale

One fund I would like to have suggested is Old Mutual’s MSCI Emerging Market ESG Index Feeder Fund (link to fact sheet) – as I know people with the best intentions worked hard to get this fund started. ESG stands for ‘environmental, social, governance’ factors, and in theory, ESG funds screen investments for dodgy environmental, social and governance practices. ESG methodologies work by assigning scores to companies according to their performance in particular areas.

But in practice, as we’ll see, most ESG methodologies are a black box that make it close to impossible to understand how this screening actually takes place. They identify the themes (such as carbon intensity, water use, governance procedures, worker pay) on which companies are assessed, but give no indication of how scoring is done or weighted in relation to other scores. In some instances, this is unavoidable, because some assessments are ultimately, necessarily subjective.

At its best, ESG screening can provide real insights into a company’s business (and helped some local investors we know of avoid the Steinhof debacle), but at its’ worst, it is unhelpful tick-box sustainability and greenwashing that failed to pick up on the Volkswagen emissions scandal.

In this instance, Old Mutual is relying on ESG data from MSCI. And it appears that data, when it comes to human rights at least, may be rather dodgy. Because the biggest holding in this fund is Tencent, a company you may well never have heard of, but which happens by a peculiar turn of fate to be the biggest holding of SA’s media giant, Naspers. Tencent is, in turn, the manager of WeChat, the ‘Chinese WhatsApp’. And WeChat reports on its users’ activities to the Chinese government.

Just last week, I sat in a presentation at a risk analyst conference, and listened to Terence Craig of Element Investment Managers outline this catalogue of horrors.

The Old Mutual Fund does indeed seem to exclude major fossil fuels companies, at least from its top ten holdings – but the last thing we as Fossil Free SA want to do is help you away from owning climate change but into owning Chinese human rights abuses. Old Mutual has another ESG fund, the Old Mutual MSCI World ESG Index Feeder Fund, and this does not include Tencent – but it is created using the same ESG methodology. If you consider investing in it (as I was), ask some hard questions first.

In short, right now it’s incredibly hard to find anything resembling an ethical investment fund in South Africa. We have to change this. We need ethical investment to be come not a rare exception, but the norm.

So, first steps, PLEASE sign up for this initiative and for our newsletter right now.

The signup form asks you for details on which of SA’s top asset managers you’re affiliated with – so that we can, in the next few months, make COMBINED approaches, as, say, 50 Allan Gray clients, or 50 Coronation clients, to these asset managers, demanding that they offer fossil fuel-free and responsible funds.

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