Sustainable investing has grown in leaps and bounds, yet a factor that often gets pushed to the margins of attention is how best to do the governance aspect of ESG investing.
According to multi-asset managers, a failure to get governance right is a threat to companies and indeed the success of multi-asset portfolios.
They say governance considerations are vital as a component of environmental, social and governance investing.
Governance has been an overarching principle of investing for many years.
In recent times, “both investors and advisers have experienced the repercussions when these standards slip” says Tim Morris, IFA at Russell & Co Financial Advisers.
“This can be with regards to mainstream funds, such as Woodford Patient Capital or, more recently, cryptocurrency providers", he adds.
Because of such financial catastrophes, Morris advises: “it is paramount that multi-asset managers conduct extensive and robust due diligence” to protect against the risks caused by poor governance.
Risk management
But it is also important to do focused research.
According to Alena Kosava, head of investment research at AJ Bell, “ESG is a broad term, with a plethora of views on the subject and breadth of implementation across multi-asset portfolios.
She says that one way to consider ESG is “through a risk-management lens”, as it has also become a crucial component in considering a broad spectrum of outcomes and external impacts, shaping capital allocation decisions and serving in preservation and growth of capital over the long run”.
Governance is crucial to business success, although has to be pragmatic enough to offer balance.Good governance, with its risk mitigation and risk management functions is key to this.
Kosava asserts: “It ensures adequate risk taking, risk management, capital allocation, manager continuation and remuneration policies, among other things.”
Despite Morris’s concerns about standards slipping, Kosava feels that the UK is “one of the leaders globally in regards to corporate governance” and “sets a leading example”.
However, she goes on to describe a “number of instances more recently, where having too stringent a code is weighing on companies’ willingness to consider a listing in the UK.
"As an example, too much regulation and relatively low executive remuneration (compared to the US, for instance), is weighing on the UK’s ability to attract IPOs.
"There’s been a lot of talk latterly around the subject, with likely changes necessary to retain UK’s standing as a leading global financial hub."
According to Kosava, the moral of the story is that governance is crucial to business success, although has to be pragmatic enough to offer balance.
Relevance
Rahab Paracha is sustainable multi-asset investment specialist at Rathbone Greenbank multi-asset portfolios.
Strong governance is close to her heart, and she believes governance issues (such as executive pay, board composition and shareholder rights) are "always relevant” as they impact on and resonate through the entire organisation.
She explains: “The way a business is run from the top has the potential to influence pretty much all aspects of the company ultimately – including other crucial environmental and social issues.
This is why for every company we hold we will always assess governance, utilising resources such as MSCI ESG ratings and Sustainalytics ESG risk ratings and research to supplement our own understanding.”
Paracha describes her company’s approach when attending to governance as part of ESG. “As we invest directly, we also have ongoing access to company management.
"This gives us the ability to form our own opinions on company strategy and vision, and how well the company is being governed.”
The way a business is run from the top has the potential to influence pretty much all aspects of the company.Rahab Paracha, Rathbone GreenbankAlongside this, stewardship plays an important role in integrating governance issues into the multi asset investment process.
“Through voting and engagement, we are able to influence a company’s corporate behaviour with the aim of prompting them to improve their ESG credentials.
"Our ESG integration work helps us to identify companies in the portfolios which may be lagging in terms of their management of ESG risks and in turn, this helps to inform the voting and engagement decisions we make”, Paracha explains.
For Paracha, ESG is essential as a component of multi-asset. She says: “By integrating ESG factors into our investment analysis, we are not attempting to eliminate ESG risks completely or only invest in companies with strong ESG opportunities.
“Rather, we are trying to gain a more well-rounded and complete view of every company we look at in order to make more informed investment decisions.”
Rathbones uses ESG integration as part of their “investment tool-kit designed to ultimately maximise risk-adjusted returns and performance” for clients which is what makes it absolutely crucial to pay attention to.
Balancing hype with longevity
With the rise of sustainable investing more recently, there has been a lot of hype and excitement around new sustainability-related ideas and themes.
For example, electric vehicles and vegan meals are becoming popular and, by extension, companies with exposures to these areas.
Paracha adds: “What we think is important to remember is that although many of these companies may have very strong E and S credentials, we can’t forget about the G, or the governance, of these companies either.
"The way the company is managed – or mismanaged – can undo any improvements it’s trying to make to the planet or people."
It is clear therefore, that governance is a delicate issue that requires careful analysis and regulatory balance. Stewardship can help ensure best practise and longevity that in turn leads to better more sustainable returns.
As part of ESG and beyond that, as part of a multi-asset portfolio, the importance of strong governance – usually less focused on than environmental concerns for example, applies to all companies, and is a core foundation of a strong, upright, and successful business built for the future.
Anita Boniface is a freelance journalist specialising in ESG
