The reasons for this are plain to see. Climate change, social inequalities and companies behaving badly, have all made headlines over the past two years, particularly during the pandemic. Along with this, David Attenborough and Greta Thunberg have made us all much more aware and concerned and have caused us to question our lifestyles and the impact we have on our planet, none more so than the younger generations.
ALIGNING PORTFOLIOS WITH VALUES
Responsible investing is an umbrella term for a variety of different approaches that includes sustainable investing, ethical investing and impact investing, to name a few. They each have their subtle differences but the primary objective is to evaluate the risks and opportunities associated with the ESG (environmental, social and governance) factors facing investments.
Some may follow a framework that clearly defines their overall responsible investment approach and how they assess companies against environmental, social and governance (ESG) criteria. This framework consists of stewardship, which involves engaging with companies on ESG issues, screening companies for their ESG credentials and integrating ESG issues into investment analysis and decisions. This approach makes it possible to align investors’ values with their investments and ensure that the companies held in a portfolio are doing what they say they are doing. Traditionally, responsible investing meant choosing companies based on ethical criteria; investment decisions were driven primarily by avoiding companies with specific negative attributes.
More recently this process has become much more sophisticated. While companies are still excluded based on negative criteria which are largely agreed at a client level (our only firmwide exclusion is avoiding investment in controversial weapons i.e. anti-personnel landmines and cluster munitions), much of the focus is on integration. Integration is about identifying and evaluating the specific ESG factors that investment faces and this is on an ongoing basis – it does not stop as this is a constantly evolving area. Additionally, the process continues with active engagement with company management on ESG issues which may take many forms, including interaction during the voting season, a thematic discussion around sustainability or in response to an incident.
In the past, responsible investing was frequently about making ethical decisions or being socially responsible. Today, the focus has moved towards achieving sustainability – not just by investing in renewable energy but by investing in companies that have integrated sustainability into both their operations and their supply chains.
Sustainability is a higher hurdle to clear and it involves much more than integrating ESG factors into the decision making process or excluding certain activities from portfolios.
Commonly, funds that are focused on sustainability tend to select and include investments on the basis of fulfilling certain sustainability criteria or on delivering a measurable outcome. This means companies will be selected based on their economic and business activities, such as the products and services they deliver, as well as their conduct, which focuses on how they operate and behave. Usually, sustainable investment means that companies held in a portfolio will need to play a specific role in the future economy and will need to be making a contribution to solving some of the world’s biggest problems, such as de-carbonisation, clean water, renewable energy or employee welfare.
STEWARDSHIP AND ENGAGEMENT
It is not enough to simply invest in companies that are deemed to be behaving responsibly and express a commitment to sustainability. Achieving future targets and creating a better world for the next generation means effecting change and constantly improving. This is why it is important that investment managers who are acting as stewards for their clients’ investment, engage with those companies and funds that they are investing in.
There are several ways to engage with companies. The first is through active ownership by exercising shareholder voting rights. This allows shareholders to express their view and engage with companies in a way that benefits investors as well as society. Voting is an important tool for effecting change but engagement is even more critical. By meeting with management teams and boards of directors, it is possible to raise major issues and concerns and gain a deeper understanding of how companies are improving their behaviour for the better.
THE IMPORTANCE OF ESG INTEGRATION
None of what has been discussed so far is of any use if an investment manager is not practicing what it preaches. In our industry we frequently talk about ESG integration because it has become a major piece of the sustainability puzzle. This involves considering something known as a sustainability risk – an environmental, social or governance event could cause a negative impact on the value of the investment – across all asset classes when investing. It is not enough to simply take what a company says on face value, either.
However, to truly be responsible investors, we must also integrate the concept of ESG across our business, not just into a single investment offering. For example, when our Climate Assets Fund was launched 11 years ago, it became one of the first funds offered by an investment manager that invested around the world with a focus on investment opportunities arising from the convergence of climate change, resource scarcity and population shifts. Since then we have developed our responsible investment approach across our discretionary holdings – be they in funds or segregated portfolios.
Yet it goes beyond product offerings. It is also important for a business to act responsibly and do the right thing for clients, employees and the community.
LOOKING AHEAD TO THE NEXT GENERATION
Ultimately, responsible investment is about the future – the future of our planet and the future of the generations to come. We know that more solutions are needed to tackle the issues facing the environment and society and that businesses need to take a lot more action to become truly sustainable. By following a clearly defined responsible investment framework and by paying attention to the investment choices of the younger generations, it is possible to do the right thing, whilst also achieving a financial return.