Despite Brexit being in full, or at least half, swing it’s interesting to see that European funding is still filtering down to promote further economic development. As an example I came across a statement recently announcing that £14.35M was being granted by the European Regional Development Fund to the Local Enterprise Partnership ‘Coast to Capital’. Part of this included a commitment of £4m to support low carbon technologies and industry.

Whilst this must be applauded it’s hard not to feel concerned that the long term effectiveness of such development will be affected by the drying up of these funding sources.  As a comparison the EU baseline funding for the 2014-2020 was £10bn whereby the UK Government spend between 2010 and 2015 was only £6.2bn.

More importantly than that however is the need for the UK to plan more strategically so that future funding and development really creates positive long term change.

At present the bodies through which development planning can be facilitated are fragmented to say the least. This view is supported by a number of economic commentators. For example in a recent blog entitled ‘what future for UK regional development after Brexit?’ Professor John Bachtler agrees that the ‘context for regional policy is not favourable with a fragmented approach to regional and local development.  He argues that a once powerful domestic, UK-wide regional policy has been whittled away with divergent approaches to regional development and institutions since 2010, superseded by local and urban initiatives with variable resources, coherence, co-ordination or permanence. These include the devolution deals, the proposed Northern Powerhouse, the Midlands Engine, Local Enterprise Partnerships and Enterprise Zones.

He goes on to say that the asymmetric path towards devolution has left the UK without mechanisms for co-ordinating policy objectives and instruments for territorial imbalance.

The formation of the LEP’s is a prime example of this fragmented approach. This originated from the Tory Government’s desire to reduce central control and bring in a bidding system to local business areas. This, not surprisingly, has led to cherry picking with LEP’s’ representing already well developed economic areas at the expense of those more needy deprived districts.

The facts do tend to back these up. For example The Manchester Institute of Innovation and Research discovered that while the UK is home to the richest region in Europe 31 out of 40 UK regions have GDP below the EU28 average.

A more strategic approach is one that is favoured by a number of continental European countries. In addition the conditions surrounding much of the European development funding encourages a more strategic approach.  For example a considerable amount of funding was offered through the EU Cohesion Policy, which demanded collaboration between Local and Central Government and the EU.

If we are to tackle the challenging issues of the 21^st century, such as adopting an effective low carbon economy, creating fairer opportunities for all, and creating transport infrastructure fit for our times we need to develop a culture of co-ordination and joined up thinking.

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In an increasingly uncertain world there is a tendency for the narrative to become more inward looking. A fear of immigration, an unease about security and potential foreign sources all contribute to a reluctance to reach out. Yet there is no hiding from the real root problem of continued poverty and inequality around the world and how this supports the conditions where flashpoints can happen, which in turn create the concerns mentioned above.

Now more than ever we need to be providing constructive aid to populations in the developing economies to allow them to move forward in order to enjoy the opportunities and environment that we take for granted.

Whilst Government Aid and that provided by the Large Charities serves a purpose in supporting infrastructure and development on a wider scale there is sometimes a slight scepticism and lethargy amongst the public in supporting these. In particular these is a fear that aid can be politicised and mis-directed.

A positive alternative to this is in the area of micro-finance, a structure that is being supported by the SRI fund management industry. A micro-finance organisation is one that provides financial loans and services to low income populations in the world. As the word suggests they work on a very localised level having very supportive relationships with their clients. This results in communities being able to improve economically but in their own way.

More and more of these MF organisations are funded via larger fund management groups, interested in developing this type of responsible investing. Triodos Bank, for example have been supporting microfinance for a number of years. Currently 15.5 million clients around the world are being supported by loans with a further 8 million benefitting from  savings contracts. They do this by financing 100 MF institutions in 45 countries.

An example would be that of the MF known as Dawn operating in Myanmar (previously Burma). In fact this is jointly owned between Triodos, Dutch Development Bank FMO, and American impact investor, Accion. As one of the few MF organisations in this deprived part of the world, its aim was to provide financial support and services to as many as possible. To date they have reached up to 54,000 individuals. UK retail investors can access MF deals like this via the Triodos bank account or via Triodos investment funds.

In addition to supporting a better standard of living MF organisations help to stimulate entrepreneurism and the self -esteem that this brings.

This is an activity supported by UK fund manager Alquity (again which can be accessed by UK investors). An example of this is via a MF organisation known as Gentera, a stock held within their Latin American fund. Gentera are a Mexican based organisation providing loans to small businesses and co-operatives in Mexico, Peru and Guatemala. Via their extensive network of highly motivated loan officers (Voted first in Mexico’s 2016 great places to work survey) the aim is help businesses grow by providing access to the first step on the credit ladder and providing entry to the formal economy. In a recent Alquity newsletter they refer to a visit they made with loan officers from Gentera  to a low income neighbourhood in Mexico city. They mention a local bakery which has been financed as part of a co-operative. The credit has allowed supplier financing allowing stock to be increased to and the business to become sustainable.

From an investment point of view this successful business model has paid healthy returns for investors like Alquity. For example Gentera are currently showing a return on assets employed of 26%.

In addition these MF organisations carry a strong ethical code towards social practices and environmental management. As a result they are able to educate their clients to create a healthy social and environmental businesses from their roots.

In the future it’s possible that companies in the current developed world will be learning from these fledgling emerging businesses. That will be a turn up but something worth supporting.

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One comment that was reeled out during the rather depressing Brexit debate was that we had to move away from the heavy bureaucracy of the European Institutions. Leaving aside the false argument that this was an unelected bureaucracy – remember we had a European Parliament electing MEP’s by proportional representation who would pass legislation , which in many ways was more democratic than our old creaking domestic ‘first past the post system – we should be very careful what we wish for here.

Many people calling for the end of European bureaucratic organisations are the same people who seem hell bent on getting rid of any ‘quango’ or executive organisation.The problem with this movement is that it has coloured the language to make us believe that bureaucracy is an inherently bad thing.

I looked up the definition of ‘Bureaucracy’ in the Cambridge dictionary. It states that it is a ‘system for controlling a country, company, or organisation that is operated by a large number of officials employed to follow rules carefully’. This should provide significant food for thought. For example take a step back and consider how many areas of your practical life depend on bureaucracy. The answer? ; well getting paid correctly, having medical services available, having your refuse collected or having local schools at hand ; none of this would be possible without the above.

Whilst there is room for improvement in the way that some of these areas are run it’s not bureaucracy in itself that’s the problem, rather I would argue it’s the reasons for it and the way it’s executed that will determine whether it’s good or bad bureaucracy. I would also argue that size is not necessarily an issue. For example to run an effective tax and benefits system we need plenty of people to ensure that the detail is in place to make the system effective and fair.

More significantly effective bureaucracy is also essential in tackling the major challenges ahead, not least of which is moving into a new low carbon world. Responsible environmental regulations can only be successful if we have a good bureaucracy enforcing it. Whilst not perfect the European Union has been a lot more effective than our domestic government in imposing necessary low carbon legislation. In light of Brexit this is something we need to revive quickly.

So when someone says to you we want to get away from bureaucracy ask them what they mean by that. In other words be careful what you wish for !

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A criticism often aimed at responsible or ethical investing is what’s the point of me doing my little bit when the majority of the corporate world continues to destroy and plunder.

 Whilst this may sound a little extreme there is a concern that the relatively small amount of ring-fenced responsible investing is having little impact.

This view however ignores an important factor, and that is that fund managers in this area are having an ever growing influence on the corporate world via engagement. There is now a growing realisation that Investment managers acting by proxy, on behalf of us, the stakeholders can initiate real positive change. The new enlightened fund manager realises that he has an active representational role to play as well as the more arms-length financial function. And results can be significant.

Most of us will remember the terrible Rana Plazza fire that killed over a 1000 workers in a clothing factory in Bangladesh in 2013. As a result the ‘Accord on Fire and Building Safety’ and ‘Alliance for Bangladesh Worker Safety’ were instigated by NGO’s and workers unions. The investment community however were very influential in getting a number of corporates to sign up to these agreements, corporates such as M&S, Primark, and H&M. Investment houses such as Alliance Trust and Morgan Stanley have also hosted investor trips to factory sites to understand some of these issues first hand.

As a direct result of the Accord 1600 factories in Bangladesh have been visited with over 1400 owners to produce corrective action plans. More specifically investment managers, such as Alliance Trust are working closely with clothing companies to encourage responsible supply and buying practices. According to Neil Brown, Alliance Trust Investment Manager, one such company is Spanish multinational clothing company Inditex, who own brands such as Zara and Berksha. Alliance invest in them partly because they are taking a marketing lead in management of social and environmental issues. This approach has contributed to financial rewards. Neil comments that since buying Inditex in 2012 shares have risen by 151.6% compared to 38% from the MSCI Europe Index. (Source Alliance trust SRI hub April 2016).

 Many fund managers are extremely pro-active in engagement with individual companies. For example Eden Tree, previously Ecclesiastical, meets over 300 companies a year regarding sustainability and ethical issues, adding a more direct approach to the engagement process. These would include contacting Hugo Boss on sustainable cotton sourcing, Sky on board diversity and SCA on animal testing. (Source Eden Tree SRI Activity Summary Jan-March 2016)

 Whist pressure works on an individual level greater change often comes about from collaborative organisations such as the PRI. The Principles of Responsible Investment (PRI) was initiated by the then UN General Secretary, Kofi Annan, in 2006. He invited a group of the world’s largest institutional investors to develop and promote the principles of responsible investment. Since those early days the numbers of signatories have risen from 100 to 1500, and because of their clout they now carry considerable weight and influence within the world economy. One recent example would be group from the PRI calling on the Indonesian President to act on deforestation caused, in the main, by palm oil cultivation. In response President Jokowi has established the Peatlands Restoration Agency and committed to ambitious forest and peat conservation programmes.

 Many in the Industry also see engagement as the way to deal with the so-called Oil Incumbents. Whilst there has been a campaign in certain quarters to encourage divestment from the fossil fuel giants many believe this is ineffective because other institutions will buy those stocks off those that sell. Organisations such as Robeco are favouring an engagement approach. For example they are supporting the ‘Aiming for A’ campaign where they are persuading the likes of Shell and BP to disclose their climate strategy and the resilience of their operating portfolios to carbon limits. This is in light of the unprecedented problem now posed by stranded assets. (www.robeco.com/en/professionals /insights)

 My view is perhaps that a combination of both approaches will eventually force the change that is needed to create a more sustainable planet. What is beyond doubt however is that engagement must continue , and this engagement must also include us the ultimate stakeholders. Many providers are now encouraging dialogue with advisers and investors. For example many companies, such as Aviva, now have twitter accounts. Others like Alliance Trust , mentioned earlier run blog sites that you can comment on.

 The point is these providers will ultimately demand what we the public ask for. If we demand that investment should respect our environment and society they will oblige.

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]]> https://richardessex.co.uk/the-power-of-engagement/feed/ 0 https://richardessex.co.uk/its-a-contribution-not-a-tax/ https://richardessex.co.uk/its-a-contribution-not-a-tax/#comments Thu, 07 Apr 2016 10:26:42 +0000 http://richardessex.co.uk/?p=2767

The thing I find most galling about the current behaviour revealed from the tax haven in Panama is that the Media and General Public are in anyway surprised !

Ever since medieval times, when taxes were first introduced there has been a desire by some to avoid paying what is due.

Of course there is a huge difference e between a slightly cheeky peasant evading the grip of an oppressive landlord and the current rich elite hiding millions today in a shady offshore haven. Greed is Greed and some will always revert to this.

why are we paying tax! Yes there is a general awareness that we need to pay for public services and roads etc., but I sense that a sort of negative haze has envelopes this sort of funding. We have become very cynical about how much good is actually being achieved. This of course has not been helped by the deficit we are still meeting but there is a view that money goes into a black hole and never sees the light of day.

So here’s a thought. Why don’t we refer to tax as a contribution? More specifically it could be broken down into certain areas such as a ‘Health Contribution’ (as for example they have in Scandinavia).This I believe would start to change the mind-set of something we have to give to something we feel is worthwhile giving to.

Of course this is more than just a name change. We as individuals need to feel a greater connection to what we are achieving as a society. Therefore is it beyond the realms of possibility for Government to produce a statement explaining what is being ring-fenced and where. Maybe this could be automatically triggered by e mail once a tax return has been made. This of course is not dissimilar to what local councils are already doing in conjunction with council tax.

Of course there are legitimate ways of saving tax. The everyday financial services industry relies very heavily on such tax planning. But again these can perhaps be presented in a more positive light. For example tax relief granted on a pension contribution could be argued as a contribution rebate. This rebate applying because it is saving potential retirement planning offered by the State.

If we can start to look at tax planning this way then perhaps we will all start to value our role in society in a much healthier way and a better society makes a better life for all of us.

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]]> https://richardessex.co.uk/its-a-contribution-not-a-tax/feed/ 0 https://richardessex.co.uk/what-money-means-to-you/ https://richardessex.co.uk/what-money-means-to-you/#comments Sun, 14 Feb 2016 19:40:26 +0000 http://richardessex.co.uk/?p=2757

For many years I have been grappling with the idea of how best to present responsible and sustainable investing to the public. I know that assessing environmental, social and governance ESG factors on top of more traditional financial analysis offers investors a better chance of more sustainable returns. Somehow, however, this message doesn’t always really engage with you, the client. However I would challenge you to consider responsible, sustainable investing from another angle.

I want you to consider ‘ What Money Means To You’ This is not a question that you will probably be able to answer straight away nor should you. It is designed to make you sit back and think. What implications does that question have ? For example

• It could mean’ how could money help you achieve your dreams and aspirations.( Don’t back away from these they should be things that you really desire. )
• Money could be a kind of comfort blanket making you and your family feel more secure.
• It might improve your self -esteem by being a reward for what you do
• or it might be a means for you to make your mark on the world or leave a particular legacy.

Whatever it means for you, and there is likely to be a mixture of factors, these are likely to be the driving factors that influence your financial choices. Going back to responsible investing I think a lot more doors can be opened by investors and their advisers following this approach.

Here are some thoughts. I

have come across a number of people in their 40’s and 50’s who really want to explore the world when they retire.  By now their kids are starting to become independent and they now have developed the experience and thirst to really embrace travel. They have a much better understanding of the cultures and environments they are travelling to. Responsible investing that pays respect to environmental and social issues would sit very nicely here.

Looking at my own situation I have a strong feeling of wanting my children, 21 and 20 respectively now, to be in a position to contribute positively to the world and enjoy benefits of a safe and optimistic future society. I also have a strong sense of wanting to leave this type of legacy for them.I am certainly not on my own here and have come across a number of people with similar aspirations. An explanation of ESG analysis used in responsible investing is likely to have far more impact once this has been established.

And because there is an ever growing diversity of funds within this space the likelihood is that there will be a fund which will dovetail brilliantly with your objectives and values.

So before discounting ethical /responsible investing as some far-out niche investment that is beyond your comprehension just consider what is really important to you and it might be a lot more accessible than you think.

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 2016 will be a good year for the responsible investors to prosper

WHY ?????

P   – Paris Agreement.  Governments  have  promised to monitor safe temperature levels more closely and have committed to the availability of more capital to achieve this.

R – Renewables.  With the cost of technology coming down renewables are becoming the most effective option for generating electricity. Nowhere is this more relevant than developing markets where grid infrastructure is limited. An example of this would be Rwanda in Africa that has just had a 8.5MW Solar Power Plant built in just a year! This is now providing 6% of the population with electricity. The intention is to serve half the population this way by 2017.  

O – Oil Strategy. As a result of recently falling oil prices many oil producing nations have been triggered into building up their renewable and energy saving infrastructure.  Recent reports have indicated that countries like Saudi Arabia and UAE are looking to replace domestic consumption of fossil fuels with renewable and energy saving technology. This is because the cost of production against low oil prices is making the fossil fuel industries uneconomic. Instead these countries would prefer to concentrate on exporting oil.

S – Sanitation Despite great improvement in recent years there are still well over 2bn people in the world without clean drinking and sanitation water. Governments recognise that utility companies must have the ability to meet this shortfall whilst recognising that water is a precious resource. These companies provide good investment opportunities.

P – Property   In a low growth, low interest economy income generating-assets such as real estate are attractive. It’s becoming increasingly evident however that sustainable returns are being secured on those properties that invest in energy efficiency, thereby cutting emissions and bottom line cost.   This is reflected in the interest being shown by investment managers and asset owners in this area. In 2015 commercial property adviser, CBRE carried out an ‘investor intentions’ survey with asset managers. They found that 70% of 280 respondents considered sustainability to be a major factor in their asset selection process.

E – Electric Vehicles.  Experts are predicting now that it won’t be too long before we start seeing a big increase in electric cars . The VW scandal has dented confidence in conventional fuel driven cars whilst the technology and cost barriers surrounding the electric cars are coming down. For example  Tesla the US manaufacturer has been successful in developing a much cheaper and more robust battery, while also developing new storage and regeneration technology using solar power.

R – Reputation. More than evercompanies that don’t respect their environmental responsibilities run the risk of serious financial loss. The effects on share price to VW following the emission scandal is an obvious example of this.

I wish to challenge the long held view by a large part of the investment community

Myth 1- The days where investment and asset managers can see environmental analysis as an optional risk are long gone

Myth 2 – Investing in environmentally friendly funds is no longer just a nice to have that could sacrifice some investment performance.

There is now more and more evidence supporting the view that ignoring environmental risk is creating financial risk. Nowhere is this more evident than in the area of Carbon Risk.

The environmental damage caused by the continuation of carbon emissions at their current rate has been a political message that we have become very used to over the last number of years. It has taken sometime however for this to permeate into the narrative of the financial industry. We are, at last, however starting to see leading financial spokesmen rise to the challenge.

In September 2015 Mark Carney, Governor of the bank of England sent one of the strongest messages yet as to the financial impact of climate change. Commenting on weather-related events that can be linked to climate change he stated that ‘since the 1980’s the number of registered weather-related events has tripled and inflation-adjusted insurance losses from these events have increased from an annual average of around $10bn in the 1980’s to around $50bn over the past decade.

The commercial implications of this are significant. Most importantly there is a growing consensus that as much as 80% of proved fossil fuels will have to be left in the ground to avoid catastrophic climate change.

We are also now starting to hear more and more of the term ‘stranded assets’, that is those assets held by companies in fossil fuel-related industries that are, in effect, a wasted asset. So how is this playing through in the investment markets?

There are some interesting indicators already coming through. For example MSCI, one of the world’s best known index providers, have developed their ‘Ex- Fossil Fuels Index’ excluding companies that own oil, gas and coal reserves. Since its launch in November 2010 to the end of October 2015 its average annualised performance was 10.27% compared with 9.07 for the standard index. It’s also outperformed the main index in all of the last 3 years.

It is fair to say that other shorter term factors are impacting performance, such as reduced demand from China and low oil price, but longer term trends are definitely coming through.

At a recent seminar I attended Henderson Global Investors, a leading environmental asset manager, highlighted the fortunes of two companies at different ends of the carbon spectrum. Peabody Energy is the largest private sector coal company in the world. Over the last 5 years its share price has fallen from over $800 a share to just over $13. By comparison Tesla ,the electric car company, who are investing massively in solar to reduce the coast of batteries, have seen their share price rise over the same period from $30 to over $200 a share.

Investment houses, like Henderson, therefore recognise ‘stranded assets’ as something they must be tuned into. As a result it could be strongly argued that those asset managers that really understand this will still a lead over those that don’t.

Oxford University’s Smith School of Enterprise and the Environment have a programme dedicated to the systematic analysis of the subject. Ben Caldecott, director of the programme, comments ‘there are some real leaders, but there are lots of investment managers who do not really know what they are doing. There is lots of research showing this stuff is financially material (but they have not yet integrated it into investment processes’.

As an investor the message should be contact an adviser, like myself, who understands this risk and can point you towards funds which will avoid it!.

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A couple of weeks ago I attended an event hosted by a new magazine called ‘Salt’, who are promoting sustainability. Among the many enlightened ideas that I gained one statement made more impact than any other.

According to the ‘Keynote Speaker’ Lawrence Bloom, previous executive of the Intercontinental Hotel Group and former chairman of the UN Environmental Programme, 32 trillion dollars is expected to pass worldwide from this generation to the next now we are in the early years of the millennium.

This is a staggering amount of money, and with all the environmental and social challenges that face future generations isn’t it essential that this money is invested wisely.

As a financial adviser I have witnessed how many of my clients take great care in formulating inheritance plans for their children and grandchildren. In other words they want to leave a positive legacy. This can include taking great care in timing when payments are made to ensure that their beneficiaries receive financial assistance when they most need it, and not when they might frit it away. Equally great care is taken to ensure that plans are tax effective, so that a disproportionate amount doesn’t go the State. But when considering legacy how many clients think about where their money is going to be invested, and whether this ultimately leaves a positive legacy for their offspring ?.

Responsible and ethical investing today means access to a wide range of funds that can provide an assurance to the client that money will be used positively to help create a healthier safer world for their children and grandchildren. These can be traditional ethical funds that screen out negative industries, such as armaments or tobacco, or they can be more ‘thematic’ funds that focus on healthy positive themes for the future, such as clean energy and health and wellbeing. There can also be funds that invest in companies that are the best in their sector, having taken into account environmental, social , and governance factors.

Equally funds can cover a range of asset classes including equities and fixed interest vehicles, allowing risk to be controlled.

Above all evidence is showing that the performance of these funds stands can stand up against their more conventional counterparts. For example, according to the MSCI (Morgan Stanley Captial International) index survey carried out in September last year the Socially Responsible (SRI) screened index out-performed the non- screened version. Since its launch in 2007 the SRI index showed an average annualised return of 3.92% v 3.35% for the non-screened.

So when leaving money for future generations it would make sense to approach your solicitor and financial adviser to ensure that your legacy is planned in the most effective way. So why not also ask whether that the money be invested in a positive way in line with your values and wishes for the future!

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It’s very easy to think of responsible and ethical investing as some special science forever at the margins. But there is a growing recognition that this approach is becoming far more mainstream. Underpinning this view is the notion that real sustainable profit can only come from Companies who have a purpose to benefit society and the environment they live in. More and more experts from many fields are talking about this link between profit and purpose.

In my last blog I mentioned how Professor John Kay, government adviser, stresses the importance to the market of companies allocating capital towards long term sustainable needs for society. Providing a further dimension to this was a TED presentation made recently by Alex Edmans, Professor of Finance at London Business School. Alex Edmans Ted Talks

In his presentation he talks about how profit and purpose is not an either-or choice. Instead the profit will follow from a company’s purpose. This purpose can be external reflecting what it achieves for its customers and users but can also be internal based on how it operates.

Alex Edmans concentrates more on the internal purpose. In particular he has investigated how employee well-being affects Company returns. This has involved a 4 year study based on ‘Fortune’s top 100 companies to work for’. In the study he wanted to look at how future stock returns were impacted by employee well-being. Using recognised analysis he discounted other possible factors, such as general industry success and other growth factors. The results showed that the share returns of the 100 best companies consistently out –performed their peers by 2-3% per annum over the period between 1984 and 2009.

This naturally has positive repercussions for responsible investors. In this regards Alex also brings up a really interesting point. Much traditional analysis, such as price earnings ratios, is so easily accessible it’s often more difficult to gain real underlying value at the time when a stock is bought. Environmental and social data however, such as employee well-being, is more difficult to access. Much of this information is offered by specialist consultants, who work closely with SRI and Ethical fund managers, whilst not currently being recognised by many traditional fund managers.

Therefore there is real profit with purpose.

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