Sustainability: amplifying our influence

Taking into account the people and planet when investing is not just for sustainable investors. In fact, most investors now say they want to consider environmental, social and governance (ESG) risks in their decision-making, according to a recent survey by Schroders.

We believe that integrating ESG into our investment decisions makes good financial sense for our clients - and there is plenty of research to support this view. The latest evidence comes from a recent study by the Swiss Finance Institute. It looked at after-fee returns of 684 funds that had signed up to the UN’s Principles of Responsible Investment (UNPRI) and compared them to 6,481 non-UNPRI signatory funds. The study found that although being a UNPRI signatory didn’t necessarily lead to outperformance, in most cases the UNPRI signatory funds had lower volatility.

Of course, signing up to a set of principles does not mean that those principles are fully embraced by every investment team or reflected in a fund manager’s culture.

Cazenove Capital regularly assesses the fund managers we work with on their approach to sustainable investment. The majority score well. Where there is room for improvement, we use our influence to promote best practice.

To help us assess whether managers are doing what they say, we have developed a comprehensive annual ESG manager questionnaire. This year’s questionnaire was sent out to 140 investment managers, responsible for £39 trillion of assets. These are managers that we have chosen to invest with on behalf of our clients.

The questionnaire covers 50 topics across five pillars. Responses are analysed and managers receive a score from 1 to 5. Those scoring a 5 are considered “leaders” in sustainable investment. Those scoring a 3 or 4 are categorised as “acceptable” while those that score a 1 or 2 are deemed “laggards.” We are pleased that the results of the 2020 ESG manager questionnaire showed that over two thirds of our managers met or exceeded our expectations. We are focused on improving the 32% of managers that fell short.  Our aim this year will be to raise standards across the board, and we hope to show positive progress this time next year as we use our influence to push for change. 

How our funds score: breakdown of funds on the House Investment List by sustainability score

^{Source: Cazenove Capital 2020 ESG manager questionnaire} 

Strong capabilities, with improvements needed in culture

Looking across the five pillars, our managers scored highest on their capabilities. 90% having strong ESG policies in place and adopt an approach to ESG that involves both investment teams and ESG specialists.

The worst-performing pillar was culture. Over 50% of managers had no incentives for senior management linked to ESG targets; 57% had boards with less than a third of seats held by women. This suggests that despite three-quarters of our managers being signatories to the UNPRI, and having significant ESG resources, the extent to which ESG influences company culture is still limited.

What percentage of board seats are held by women? 

^{Source: Cazenove Capital}

When looking at managers’ approach to engagement and voting, there is more variation. The vast majority engage companies and have a follow-up process if targets aren’t met. However, over 50% of engagements are focused on governance issues, rather than more difficult environmental and social issues. Similarly, of those managers able to vote at company meetings, 81% have a voting policy in place – yet less than half have taken a stance on climate change and human rights.

Our managers are focused on risk reduction and climate change

At the end of our questionnaire, we asked managers what ESG themes they are focusing on. Embedding ESG risk analysis into their investment process is top of the agenda. They are also focused on getting companies to disclose their carbon emissions and provide more information on climate-change related risks. We will continue to work with them to develop best practice in sustainable investment.