EquitiesMar 2 2015

What is sustainable investing, anyway?

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To say sustainable investing is a broad term would probably be one of the biggest understatements in investment.

The parishioners in the ‘church’ of sustainability include ESG (that’s environmental, social and governance), SRI (socially-responsible investing) and the more nebulous ‘ethical’. These terms themselves are extremely broad.

The lack of a homogenous adjective could well be a barrier for this part of the fund industry, because while its desired outcomes are laudable, navigating and understanding the universe as an adviser is potentially quite difficult.

What’s in a name?

A straw poll consensus seems to suggest ESG is the best way of actually expressing what sustainable investing is.

‘Environmental’ covers such things as renewable energy or the impact a company has on the environment; ‘social’ covers how companies deal with issues such as fair pay for their employees; ‘governance’ includes the aims management has for a company.

Yann Gindre, head of networks and global outreach at the United Nations-supported Principals for Responsible Investment initiative, says one issue with sustainable investment is that many fund groups agree on what it is but adopt different names for it.

The PRI has 1,325 signatories globally including asset managers, and represents $45trn (£29.2trn) of assets under management.

Essentially though, Mr Gindre seems to agree ESG is probably the broadest way to think of sustainable investment.

“The term which covers the most areas is ESG because it covers various factors,” he explains. “ESG should be supplementary to financial analysis.”

He points out many private equity investors are well versed in assessing businesses on ESG grounds and will analyse the management and governance of a company, as well as consider social and environmental issues which could impact the business down the line.

Aviva Investors’ Ian Aylward, a multi-manager at the firm, says picking ‘sustainable’ funds is fairly intuitive as they are categorised by data providers.

But finding a fund firm which espouses ESG credentials throughout can be tough.

“Finding funds from a firm that believes in sustainable investments is less straightforward but characteristics that one should look for are signatory to the UNPRI, adherence to the Stewardship code and specific comments within due diligence questionnaires,” he says.

Mr Aylward also encourages engagement – suggesting investors need only ask fund groups how they deal with ESG issues to find out if they have a clear policy or not.

“My team uses a system from MSCI that awards ratings to stocks based on their ESG / sustainability characteristics,” he says.

“We monitor the funds / mandates we have with external managers to make sure we have negligible lowly rated stocks and we question the portfolio managers on any that they may hold in our regular meetings.”

Mr Gindre agrees the best way for advisers to be sure ESG issues are important to a fund group is to engage them on the topic.

“If you want to change things it will be hard but you can call the asset managers or asset owners to influence them to ask the right questions,” he explains.

What’s in the portfolio?

Mr Gindre adds investors might be surprised at the stocks which could be investible on an ESG basis. In addition to thematic funds operating in obviously ‘sustainable’ areas such as renewable energy, a variety of major blue chip stocks could fit into a more mainstream ESG-filtered fund.

He says both Royal Dutch Shell and BP – stocks which may be discounted by strict ‘ethical’ investment mandates – have greatly increased their shareholder engagement after pressure from investors.

He says both oil giants have published documents on what they each plan to do about finding sustainable sources of energy for customers, which means both firms are “going in the right direction” meaning it “could be a good time to invest”.

Mr Gindre also says while the debate about sustainable investment usually focuses on equities, companies issuing bonds also hold roadshows – a good time for ESG questions to be posed.

“When companies are raising new debt they have roadshows and as an investor you can ask questions related to ESG,” he says.

“The investor has the power here and if you don’t think they have the right answer then don’t invest.”

Haydon Waldek, director at Gaeia – Global and Ethical Investment Advice – advises clients who have specific desires for their investments in terms of them being sustainable and ethical.

Recently, the company, via its investment affiliate Castlefield, made an investment for its discretionary clients in retailer Debenhams based on an assessment of its sustainable and ethical credentials.

Mr Waldek said Debenhams had a sustainability microsite which was out of date so a call with the retailer was organised and the company said the site would be addressed.

Mr Waldek said Castlefield then spoke to Debenhams’ director of ethical trade and corporate responsibility and came away from the call “confident Debenhams is well aware of the key issues facing the sector and has appropriate policies in place to tackle them”.

These ranged from participation in the Sustainable Clothing Action Plan, which aims to cut carbon emissions, water use and waste to landfill, to their internal audit requirements for their supply chain, “which entails strategic approval being required by the sourcing team before a factory can be approved”.

This shows the importance of communication in understanding the sustainable or ethical elements of investments.

Alliance Trust Investments has made moves to boost its presence in the sustainable space too. The company publishes its sustainability criteria on its site and all the companies held in its Sustainable Future funds are disclosed on the factsheets.

Mike Appleby, investment manager at the group, said it also had an advisory committee, which helped it “ensure we are informed about sustainability issues and they have oversight of all our holdings”.

“They can (and have) challenged the investment team where they feel clarification or justification is required for a given investment,” he adds.

Growing awareness

The PRI’s Mr Gindre says there is a rising groundswell in the industry of acceptance of ESG. He cites the fact investment bank Morgan Stanley recently produced a brochure on the topic entitled ‘Embedding Sustainability into Valuation’ shows the topic is becoming more prominent at the highest levels of investment.

The bank, as well as rival Barclays, have ESG index funds too. Advisers may also be aware of another example, the Vanguard FTSE Social Index fund, which invests in stocks screened for certain social, human rights, and environmental criteria.

The PRI will also be better positioned next year to help advisers gauge how fund groups are performing in terms of sustainable and ethical policies.

From June next year, PRI signatories will be able to publish their scores from the body, something which was agreed by the PRI board to encourage more transparency of information.

At present, signatory assessment reports, which are carried out annually, can be found on the PRI website so advisers can read their answers to a whole host of questions.

Some, including Robeco, have taken the decision to publish their score from the PRI, something other groups may do if they are particularly proud of it.

Whether advisers embrace sustainable investment already or still find it a minefield, the proverbial juggernaut is coming.

As the PRI’s Mr Gindre highlights, major investors such as the heirs to the Rockerfeller oil fortune and pledged to disinvest from fossil fuels and California’s pension scheme has also suggested it may soon not invest in companies which do not assess their impact on the climate.

“It is something this only started in the past two years but it is accelerating,” Mr Gindre says. “Looking at it, it is great, but we still have a long way to go.”

bradley.gerrard@ft.com