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Sustainability is no longer a niche

Adam Martell is an investment manager and charity champion, based at our office in Leeds.

Sustainability is a key topic for today’s investors and charities are no different. Importantly, a high return on investment does not have to come at a cost to society. However, investing sustainably is a buzzword treasure chest, so firstly, what is ESG?

by
Adam Martell

in Features

28.11.2019

Sustainability is a key topic for today’s investors and charities are no different. Importantly, a high return on investment does not have to come at a cost to society. However, investing sustainably is a buzzword treasure chest, so firstly, what is ESG?

In practice, it is assessing the Environmental, Social and Governance (ESG) factors of investments. But then what of SRI – Socially Responsible Investing? This includes proactive investment in positive areas, such as social impact, communities and climate change.

Between client and investment manager, such jargon often confuses rather than clarifies. An important part of the investment manager’s role is to explain how and why the portfolio is able to meet a charity’s sustainability goals, in addition to the financial objectives.

Broadly speaking, there are two main approaches we employ in Leeds: Positive (i.e. promoting sustainability) and Negative (i.e. avoiding unsustainability). For many clients, including charities and social enterprises, a blended approach of both is often the most effective.

Positive influence

In the words of Sir John Templeton, an early pioneer of value investing: “Ultimately if a business is not ethical, it will fail, perhaps not right away, but eventually.” Ethics is a broad term, but at the ESG level of environmental, social and governance, the implication is businesses not embracing these areas are unsustainable. However, it doesn’t explore the view that investing positively in ethical businesses can help achieve positive change.

At a direct stock level, through our membership of the UN Principles of Responsible Investment’s Collaborative Engagement Platform, we have worked to exert positive influence over industries in which our clients have direct or indirect exposure when we believe there is scope for improvement in the standard of business practice.

There are also opportunities for positive investment in collective funds. For example, Threadneedle UK Social Bond fund invests in bonds issued by organisations that support socially-beneficial activities and balanced economic development, primarily in the UK, such as affordable housing, education, employment and training. A percentage of the fund’s earnings also go towards supporting Big Issue Invest’s work financing social enterprises.

Ever-increasing importance

Not long ago, oil, tobacco and alcohol stocks were staple ingredients in many charity portfolios, but today many trustee boards are looking to limit, or altogether eliminate, exposure to such sectors.

For example, there is clearly some debate on what is the best route to achieve a lower-carbon portfolio. However, there is widespread support for divestment of coal and oil tar sands. The Church of England, for example, bans new investment in companies deriving more than 10% of revenues from these areas. This approach balances both strategic engagement with companies such as Shell and BP to meet the criteria, with hard exclusion of those that do not, such as Anglo American and Glencore.

As investment managers, we do not outsource our stewardship responsibilities, but draw upon research and recommendations from experts. We see stewardship of investee companies as an integral part of the wider investment process and employ various methods of engaging and monitoring to achieve this.

This includes observing the UK Stewardship Code, incorporating ESG into our analysis and adherence to the UN principles for responsible investing. From an investment manager’s perspective, this combination helps us to better achieve our central purpose – to maximise returns for our clients by seeking out businesses with sustainable business models that can deliver long-term growth.

There are perceptions that ethical investing is for a certain eco-conscious subset, but the evidence doesn’t back this up. Whilst particularly important for charities, a sustainability focus is becoming more relevant for all clients. For charities especially, an Investment Policy Statement can help articulate these goals. Functioning as a “what good looks like” guide between investment manager and trustees, the policy translates a board’s environmental social and governance goals to ensure the investment manager can put these ideals into investment reality.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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