Responsible investing

The growth and importance of Responsible Investing

15/07/2016

The integration of ESG

By Jessica Ground, Global Head of Stewardship at Schroders

Responsible Investment has become increasingly important to many of our clients around the world. As with any area of investment that has witnessed dramatic growth, Responsible Investment covers a variety of approaches from ethical exclusions, to thematic funds to integrating ESG issues into investment processes. The team’s activities are broad to ensure that we can meet expectations in all of these areas. Our integrated approach spans the breadth of the ownership lifecycle, from identifying trends and analysing companies through engagement, voting and reporting. The United Nations Principles for Responsible Investment (UN PRI) annual assessment, rates and ranks investment managers of a similar size and comprehensively assesses their practices across asset classes. Schroders achieved the highest possible ESG score of A+ in 2016 for our overarching ESG practices.

Central to any responsible investment philosophy is the desire to preserve and grow capital in the long term, and this philosophy naturally leads us to focus on the sustainability of the companies and securities in which we invest. We believe long-term investment is intrinsically linked to identifying, understanding and incorporating the effects of ESG trends in our investment decisions and ownership.

Integration into Investment Processes ESG issues

Integration into Investment Processes ESG issues are sometimes difficult to value, experience has taught us that these factors can have a material impact on a company’s performance, both in the short and longterm. Academic research shows that companies with good ESG management benefit from a lower cost of capital. We firmly believe that analysing a company’s exposure to, and management of, ESG factors, in addition to traditional financial analysis, will enhance our understanding of a company’s fair value and its ability to deliver long-term sustainable returns.

We seek to integrate ESG considerations into our research and investment decisions across investment desks and asset classes. We recognise that different asset classes, portfolio strategies or investment universes will require different lenses to most effectively strengthen decision making. We are increasingly able to use data as a tool to understand ESG risk. For example, we are developing a capability to monitor the asset exposure of portfolios, carbon footprint and climate change risk management strategies of portfolio constituents. Publically available ESG data has also increased dramatically in the past five years and become more standardised. We are developing tools to mine this seam of data to enhance our research processes in this area.

Thematic Research 

Producing thematic reports is an important part of integrating ESG and educating investors. Since 2000 we have produced 16 pieces on climate change and covered topics as diverse as living wages and sugar. We seek not only to educate investors on issues but also to be clear about the impacts on a company level, which we believe will to better investment decisions.

Governance and Stewardship

A clear trajectory has been building over the last century, establishing good governance and oversight as an important part of the fiduciary duty for companies and investors. This trend shows no sign of slowing; Stewardship Codes for asset managers and owners are being rolled out around the world. As they become established, expectations are rising. The demand is for those in the investment chain to be transparent about their activities, objectives and outcomes in the governance arena. High standards of governance and corporate and social responsibility are important to us and we believe they are likely to lead to outperformance in the long-term. In 2015 we voted against 15% of company resolutions globally, a doubling from where we were two years ago. We are transparent about our voting activities, publishing our decisions externally.

Engagement

We have a long track record of engaging with the companies that we invest in on ESG issues, seeking to improve their performance in these areas. During 2015 our fund managers and analysts – across equities and fixed income – held more than 16,500 company meetings which provided a platform to discuss ESG topics. Specifically, our ESG team engaged with almost 500 companies across 33 different countries. It is essential to establish a dialogue with companies to assess how they are managing ESG risks and responding to change. We encourage open discussions on best practice. Evidence shows that this can provide performance benefits too. A recent study by MSCI showed that strategies that looked to invest in those companies who are improving their ESG scores had an added value of 2.2% per annum respectively, an even larger degree of outperformance than just having a tilt towards those companies with already existing strong scores.

Exclusions

We have a long and successful track record of managing exclusion mandates against clients’ ethical criteria where we manage £30 billion of assets. We have invested in the tools and data providers to ensure that client’s expectations in this area can be executed on. Clients are frequently asking us to provide education around ESG and we welcome ongoing dialogue as this area of investment continues to evolve. In our experience a rigorous understanding of all the risks that a company faces – financial, environmental, social and governance – leads to better investment decision making. Ensuring that companies are being run in a sustainable manner through engagement during ownership can further improve returns. Those with fiduciary responsibility should be encouraging those managing their money to take such a long-term holistic approach to investment. They should also be looking for evidence that ESG integration is more than green-washing, but adds value to investment processes through integration and engagement.

Impact investing: Social Investment Tax Relief

By Alexia Zavos, Head of Responsible Investment and Lyn Tomlinson, Wealth Planning

We have seen an increasing interest from clients in social impact investing in line with global trends whereby investors aim to achieve specific social objectives as well as financial returns. Annual research for Good Money Week (2015) found that 54% of British investors want their investments to have a positive impact, beyond just making money. The next generation are accelerating the trend towards aligning investments with personal values. Morgan Stanley completed a survey earlier in the year which found that millennials (those born between 1980 and 2000) were twice as likely to invest in companies or funds which target social outcomes and to divest due to deplorable corporate activity.

Big Society Capital states that the market in the UK could be worth as much as £1.5 billion. The research suggests that social investment deal-flow in the 2015
calendar year saw about £428 million of deals offered to about 700 charities and social enterprises. This has nearly doubled in value since 2011. There are a number of challenges around investing in the space however, this year we were able to make our first Social Investment Tax Relief (SITR) investments on behalf of some clients. SITR is a relatively new tax relief in the UK designed to encourage individuals to invest in charities and social enterprises. It is modelled on the existing Enterprise Investment Scheme, and individuals benefit from 30% tax relief on the amount invested. One key difference is that enterprises are able to raise both equity and unsecured debt. At the moment an enterprise can only raise £275,000 on a rolling three-year basis. However, we hope this limit will be raised to £15 million over the next 12 months which should increase the available investment options in this space.

This article is issued by Cazenove Capital Management which is a trading name of Schroder & Co. Limited, 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Issued in the Channel Islands by Cazenove Capital Management which is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital Management unless otherwise stated.