When clients entrust us with their money, our primary aim is to grow and preserve it in a responsible manner that best meets their goals and objectives. In practice, that involves taking an enormous number of decisions with a wide range of criteria.
“Sustainability” has long been a buzzword within the investment world. While many interpretations may exist, for us there is a clear definition: sustainability means being able to meet the needs of today, without compromising the ability to meet those of tomorrow.
When we examine investments – either ones that we already hold or are considering holding – we apply traditional financial analysis. But alongside this we are also considering environmental, social and governance (ESG) risks, as a fundamental part of the process.
Why sustainability matters to every investor
Potential returns are not isolated from potential risks. Our responsibility to clients is to produce the best risk-adjusted returns, and that requires us to be alert to possible downsides on all fronts.
ESG factors can have a material impact on financial returns, which is why a consideration of these is a concrete part of our risk assessment.
It is not only about risk control. We believe that a deep understanding of ESG issues can identify opportunities or investment themes that traditional financial analysis might overlook, and better ESG performance should lead to better investment performance.
When we choose investment funds, we first look at the asset manager’s overall approach
We make investments into a very wide range of funds offered by many different asset managers based around the world.
This involves quantitative screening, which drills down into the financial details of a particular fund and its performance; as well as qualitative assessment of the fund’s management team, culture and approach.
In addition, we have developed a unique scoring system that scrutinises asset managers’ processes and distinguishes between those firms where ESG policies are intrinsic to their model, and those companies where ESG policies are secondary considerations, superficial – or even non-existent.
Our scorecard attaches particular weight to examples of how an asset manager has participated actively in industry initiatives; is active and transparent on voting and engagement activities; and where ESG considerations have influenced the firm’s investment process and the range of investments on offer.
The scale of the firm’s sustainability resource – in terms of dedicated staff and their experience and reporting line – is among other criteria captured in our scoring process. Size of assets under management and any other specialty focus are of course taken into consideration.
But we also scrutinise the individual fund managers
Most asset managers are structured as a series of teams, where different teams are responsible for different funds, following different strategies. Our scoring approach interrogates how ESG is integrated into the investment process at the fund level.
We ask fund managers to detail how ESG factors are incorporated within the stock selection process for their specific strategy, and we ask them to cite specific and recent examples. Did ESG considerations lead to particular decisions being taken about a particular stock?
We also ask individual managers if and how they utilise the wider in-house sustainability resources, or where they otherwise source their ESG information.
When combined, our process of scoring both at a firm level and at a strategy level provides a compelling insight into how ESG considerations are manifest in the companies we choose to entrust with clients’ money.
Our ESG scorecards are regularly updated, along with the other traditional analysis we apply to funds in which we invest or are considering investing.
Does this mean investments in certain controversial companies or industries are automatically avoided?
No. There is no universal definition of ESG or sustainable investing. These terms will have different meanings for different investors. We embed considerations of ESG factors in our fund selection process – as described above – in order to maximise riskadjusted returns for all clients.
We believe that companies that score poorly in terms of ESG are likely to pose higher risks to investors’ capital, and so we integrate our ESG risk analysis process primarily to limit risk.
This is different from our specific Sustainability Service, where we can tailor individual client’s portfolios to reflect their personal values when it comes to selecting investments. With this service we can apply screens and exclude industries or companies according to an individual’s preferences.
We can also apply a more positive approach to sustainability and invest in those best-in-class companies in terms of ESG, or invest along a sustainability theme such as water, renewable energy or social impact, among others.
Would we always avoid funds that have a low score in relation to sustainability?
No. Our analysis is always undertaken as part of a wider appraisal of the risk management procedure. So it is possible that an investment will be approved despite having a low ESG score, provided other risk procedures are robust enough to alert managers to the sorts of risks that an ESG assessment would have highlighted.
Sound stewardship and raising standards
Producing the best risk-adjusted returns for clients is a primary aim, but we also take extremely seriously our requirement to be good long-term stewards of clients’ assets.
Our unique approach to incorporating ESG into our fund selection process allows us to interact with the managers we invest in and encourage better practice – especially with those that we deem as having a poor ESG integration process.
We want to see these firms, too, becoming more active and engaged investors, and to demonstrate higher standards in terms of their transparency and reporting, and their own analysis of ESG risks.
Investors will increasingly come across the term ESG in relation to their investments. But what exactly does it stand for?
The environmental performance of a company is typically considered in two ways. Firstly, the impact the company is having on the environment. Secondly, the impact of natural resource constraints on a company’s profitability.
The social element involves looking at how a company interacts with society and the impact it has. This not only includes examining a company’s relationship with the communities it operates in, but also how it interacts with suppliers, employees and customers. Equally as important is assessing a company’s ability to adapt to structural social trends that may impact its business model and profitability.
Stripped back to basics, governance is about how companies are run. It takes into account the quality and robustness of a company’s internal structure and practices.
An investment approach that takes into account the above three factors should in principle lead to a more robust assessment of the environment in which a company operates and its ability to manage different stakeholders.