ESG structured products: a poisoned apple?

Blair Carmichael, Lowes Financial Management

Investec launched their latest tranche of structured products on the 3rd of August, and our team were intrigued by one product in particular – the Investec FTSE4Good 6 Year Deposit Plan 1[1]. The underlying Index to which returns are linked is the FTSE4Good UK 50 Index, which is an index that considers all FTSE All-Share stocks which meet FTSE Russell’s ESG Ratings Data Model, then selects the 50 stocks with the greatest float-adjusted market cap, whilst limiting the maximum exposure to any one security. But what is ESG? Put simply, ESG stands for Environment, Social and Governance, and is a way of rating how well companies focus on factors which promote values associated with protecting the Environment, addressing Social issues, or promoting good corporate Governance.

There are, of course, several different ways of looking at ESG, but having the investment returns linked to an ESG index doesn’t make the product itself an ESG product, but provides the means for investors/depositors to benefit from the performance of an ESG index.

We think it is important to appreciate the difference here. Whilst this product may be billed on Investec’s adviser site as ‘The UK's first retail Deposit Plan linked to an ESG index’ (which it is not, as IDAD launched one in December 2019 [2] ) it is not inconceivable that the counterparty bank could ultimately be lending deposit funds to any number of entities which may not meet the client’s ESG ideals for a variety of reasons. What may need to be considered if we wished to assess the likelihood of the depositors’ capital being used in an ‘ESG’ friendly way, is the counterparty’s ESG ranking. According to CSRHub, a provider of ESG ratings for companies around the world, Investec Plc places in the top quartile of companies when it comes to their Corporate Social Responsibility, and ESG Metrics[3]. Taking a closer look, we can see that this has been the case over the past two years, but the data also suggests that the average in the brokerage and capital markets industry is about the same.

Like most responsible organisations, Investec Bank and its parent aim to address ESG matters [4] and have a Corporate Social Responsibility (CSR) & Environment, Social, Governance (ESG) ranking on CSRHub slightly above its industry average, so that may satisfy many of those looking for ESG investment.

It is important to stress that nowhere in the client facing document does it claim that this investment is an ethical or ESG investment but we expect its index link will give that impression to some. Whilst it isn’t necessarily an ethical or ESG investment it might be appropriate for those who believe the corporations within the FTSE4Good UK 50 may perform better than say the FTSE 100, without deeply caring about how their funds are utilised.

One must also consider whether indices that are labelled as ESG such as the FTSE4Good UK 50 address rudimentary ideas on ESG investing. Despite companies within the index having gone through countless screening filters they are, in the main, simply the 50 most ‘ESG friendly’ companies listed on the UK stockmarket and as such the index still contains some companies that might come as a surprise to ESG investors. As an example, 6.21% of the index is represented by Royal Dutch Shell, one of the largest oil conglomerates in the world[5]. A further 6.1% is made up of Rio Tinto and BHP Group, two of the biggest mining companies in the world. Whilst these firms may have been included due to their positive approach to improving how they affect the environment, would an environmentalist investor be happy with them in their portfolio?

As has always been the case with ethical investing, socially responsible investing, and now ESG investing, everyone will have differing opinions as to what is acceptable and what is not. If an investor is looking to invest in a particular way, then it is important to fully understand what is going on within an investment, and not just accept what you first see at face value.

Any data or views given in the article should not be construed as investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.