Analysing ESG Risks - Hargreaves Lansdown

I’m so proud of the Ethical Investing series I did recently - four blogs and two newsletters - pretty comprehensive whilst not getting too bogged down. I ended up with piles of extra reading and I’ve been wading through it slowly.

The article I’m going to share has been on the list since I started writing about four weeks ago.

How To Analyse Shares In Different Sectors by Hargreaves Lansdown

Throughout the series I emphasised how personal the decisions were to you - whether ethics were going to be part of your investing, how much and which issues you’d focus on. I explained the different tools that industry professionals use to assess and make decisions (like screening, engaging or best in class tilting etc). I also explained how the professionals find their data, make decisions, tell us about that and some of the problems with that.

This article is about that analysing process - I’m coming at this from the perspective of a fund manager because most of us will access these shares through funds - so it sheds more definitive light on that process. But it could also be helpful if you’re going to choose individual shares for yourself.

ESG Risks By Sector

The point of the article is that each sector has different ESG (environmental, social and governance) risks - some higher and some lower but each being affected by very specific issues.

So you wouldn’t assess a company in telecommunications in the same way or in the same grounds as a real estate company for example.

It makes perfect sense when you think about it. The fund managers aren’t just fancifully chewing their pens, staring into the distance and hoping that the company directors are being nice people - they want specific, measurable and tangible ways to assess the ESG status of a company.

Here are some of my highlights:

ESG Risks In The Basic Materials Sector

This relates to the discovery, extraction and processing of raw materials for use in other industries. It’s a big one because everything from building, publishing to drug manufacturing rely on it.

According to the article it’s a high risk ESG area and common sense tells us that the environmental part of this is going to be difficult - stuff relating to emissions and waste management isn’t going to be fantastic but there are difference between different regions (European firms out performing Northern American firms for example).

Interestingly though, and also pointed out in the article, community relations - which is part of the social aspect - is also a big issue here. The impact mining has on a local community is a key concern, in terms of the environment but also potentially water usage, human and employment rights, indigenous people’s rights and biodiversity on sites. The companies would be expected to have robust plans and safeguards in place regarding those issues - which relates back into the governance aspect.

And another little governance issue which they spell out - the effect of bribery. I don’t know anything about mining really, but I know I’ve read about backhanders and corrupt politicians in that industry, persuading the-powers-that-be to move in ways which don’t work for their communities or environments. It’s a good reminder that the E, S and G are all intricately intertwined.

So a strong emphasis on the environmental but also how they govern the environmental impacts on their communities. Contrast that with:

ESG Risks In The Healthcare Sector

Which includes companies that produce, manufacture and test pharmaceuticals and medical equipment, hospitals, surgeries, clinics and nursing homes as well as bio-technology companies, but also health insurance companies and even some of the financing and investment behind these industries. It’s wide!

The article considers this to be a medium risk area but what I found most interesting was just how different the risks are. Here they’re interested in product safety, data protection, commitment to fairness and transparency in pricing, availability, staff remuneration and responsible marketing.

If we take the product safety issue that entails governance issues like strong chains of command, regular training, risk assessments, auditing, certification, disclosure and whistle blowing policies but all of those also touch on the social aspect - you need competent staff who are treated well and capable of assessing risk themselves and responding appropriately.

This reflects on the impact to the end consumer in a way that the basic materials sector simply didn’t. This is much more social and governance based. Net zero policy does appear, as it does in all of the sectors they highlight, but it’s lower down because it’s of lower risk in this sector.

Who Knew Assessing ESG Risks Could Be So Interesting??

I don’t think any of this is rocket science. I’m sure you’re not shocked that emissions are a bigger issue in the mining sector than they are for a health insurance company but as I was reading through it really sort of spelled out what the fund managers will be looking for.

It must be such a detailed job - and interesting one for somebody who enjoys learning about corners of the world that they’re directly involved in! Ultimately, sector-by-sector analysis helps us understand why ESG isn’t one-size-fits-all, and why fund managers’ work is far more nuanced than many investors realise.

Understanding might help you feel more confident when choosing funds, reading ESG reports or deciding how much ethics matters in your own investing.

Love Eleanor. xxx