On the 14th May, Charles Stanley hosted an educative roundtable discussion in partnership with Charity Finance Group. Whilst Environmental, Social and Governance considerations are now well-practised throughout the investment world, the topic has gained new traction due to the pandemic and has urged both charities and regulators to decide a more coherent approach.
Working on the assumption that attendees had a good understanding of what the E, S and G meant, we explored why the topic of ethical considerations within investment portfolios was continuing to demand further exploration and implementation. From this we identified three key reasons:
- Materiality – ESG factors play a vital role in driving share prices. Long gone is the myth that ESG considerations can’t deliver profit and returns, but quite the opposite with high-performing ESG stocks providing better risk-adjusted returns.
- Market Demand – more investors want more of a say in how their money is invested and what it is invested in.
- Regulation – there is now increasing pressure on the financial industry to do more in considering these factors and being transparent in doing so.
Transparency was an important topic throughout the roundtable. As ESG rises within the financial sector, so does the amount of available funds and high-scoring stocks which aren’t necessarily all that they seem. Greenwashing is something to be aware of and it is important to take the time to look at all angles of a company, ratings and funds to really determine if that selection supports ethical views held. We encouraged Trustees ‘to check under the bonnet’ of their investments, particularly as charities are increasingly entered into a pooled or collective fund. Whilst such funds have been the general direction of investing for some time, when it comes to ESG considerations, it is easy to be blindsided by the ‘ESG’ title without real consideration to the implications of the stocks within. For example, by focusing on excluding one company or sector you could be negatively impacting the environment by applying pressure and reliance on another sector. Using the MSCI World ESG Universal Ratings, whilst their exposure to tobacco was at a low 0.8%, its carbon emissions weighed in at 88.4%, a significant percentage compared with the World ESG Leaders and World SRI indexes (58.4% and 50.4% respectively).
For the second half of the event, we used breakout rooms to encourage a more in-depth discussion about specific concerns on: ESG policy implementation, the support charities would like to see from their investment managers on ESG decision making and their expectations for ESG investing in the future. This was particularly interesting, as each attendee was at a very different stage of their investment journey, with varying amounts to invest and entirely different attitudes to what was considered important to their charity. This highlighted the earlier point, that a pooled or collective fund would not be suitable for all charities who have varying priorities and objectives.
Within the three breakout rooms, the largest concerns were:
- Where do you start? – For both Charities at the start of their investment journey and those with a more sophisticated knowledge, both required support to understand investing in general on top of the additional ethical options available.
- What am I actually investing in? – Each charity understood that their objectives and factors were very different from one another. They were surprised to find out that they were likely to be in a fund with other charities in very different circumstances to them, and how little they knew about the investment holdings within those funds. A fund, no matter how broad or nuanced, prevents investors from being as selective with their investments as they may want or need.
- How do you strike the right balance? - How do you balance positive return with your ethical priorities? As the charity commission begins to finalise their draft advice, it is becoming clear that whilst returns are important, ensuring your investments are heading in the right direction as your charity’s beliefs is equally important. So far, there is nothing to suggest that ethical considerations should be at the expense of your portfolio returns.
To summarise, all charities felt greater pressure to start incorporating ESG factors into their investment process. Not necessarily from donors or beneficiaries, but a top-level interest to ensure their charity is positively impacting wider society whilst creating returns to protect their future. Here at Charles Stanley, we tackle ESG through a trifold approach; ethical screening, stewardship and ESG integration. A bespoke approach avoids a one size fits all and allows you to have a greater understanding as to how your assets are being managed and exactly what they are being invested in. In short, we always look under the bonnet.
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