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/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.

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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So much of the mantra surrounding responsible investing lies in the idea that an investor is best served by taking a longer term view. The question is therefore; ‘can better value be delivered that way both for the investor and society.

Professor John Kay certainly thinks so.

Professor Kay CBE is an eminent British economist, who recently carried out a review for the Government on just this subject. I was lucky enough to hear him speak at a recent seminar hosted by the fund manager , ‘First State Investments’. During the seminar Professor Kay explained why over the last 20-30 years investors had been increasingly let down by the short-termism of markets and operators. He went on to state why there was need for change and why there is a need again to allocate capital for real needs in society, which in turn will offer real financial value.

Short Termism

He pointed out how stock markets had become so reliant on secondary trading and so little concerned with producing real value. The statistics are frightening. For example over the last few years world markets have effectively traded between $70 and $100 for every dollar of real underlying value.

What are Markets For ?

He then suggested there were 4 principle roles for financial markets.

• To operate a payment system
• To help manage risk
• To manage wealth through investors lifetimes
• Most significantly- To allocate capital

He emphasised this last area because it’s one which fund managers desperately need to re-learn. In particular he refers to the need for Search and Stewardship

Searching for those areas that really offer long term value for society and the investor.

Stewardship – to ensure that capital is looked after effectively to meet these needs

This is happening now !

There are real signs that this is not just theory but is working right now !   A good example of this would be WHEB one of the first retail fund managers to produce an ‘Impact Report’. This looks at the environmental and social impacts of the group of holdings it invest in. These holdings are spread across nine positive themes including Cleaner Energy, Sustainable Transport and Resource Efficiency. Impacts are then measured across the different themes as well as against the fund as a whole.

For example the overall carbon footprint of the fund was 92 tonnes of CO 2 per £1m invested compared with 282 tonnes per £1m for the market as a whole (based on the MSCI World Index). Interestingly financial results showed that the 5 year Historical Sales Growth for the group of companies in the fund had significantly out-performed the wider market.  In other words responsible fund managers are showing that investing in positive long term growth areas is reaping rewards for the pocket as well as society.

This is not just theory !

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