“Over a long-term period, sustainable investors have not seen worse returns than the average funds.”
The sustainable funds were launched in 2001, when the team were part of Alliance Trust Investments and had accumulated close to £3bn in assets before they were soldto Liontrust earlier this year, with chief executive John Ions banking on the area being one with strong growth potential.
The strategies under Mr Michaelis’s purview are underpinned by two methods.
The first method is that they embed long-term trends into the analysis. These would be themes around healthy eating, energy efficiency changes, technology, innovation in healthcare and cyber security. Mr Michaelis said often the market tends to under-appreciate companies exposed to these structural trends.
The second is that they look in detail at how companies operate.
Mr Michaelis added: “We don’t just review the common financial factors everyone looks at. We look more broadly at ESG factors, which gives us a better picture of the quality of management. Those are the extra bits of analysis we build into our approach, which give an information advantage.”
Hermes research shows that the quality of corporate governance within businesses is linked with better risk management, company performance and higher investment returns over a long period. As a result, better-governed firms consistently outperform their poorly governed peers.
Despite some having a perception about the performance of sustainable funds, there is a growing awareness among advisers.
The challenge is how to decipher whether ornot a fund truly incorporates an ESG strategy, beyond just checking the holdings within the fund. To help IFAs in this analysis, a number of ratings firms, such as Morningstar, have launched their own sustainable ratings on funds.
Kate Hewitt, co-owner Castlefield Investment Partners, said: “There is increased recognition among fund managers of the demand for ESG criteria to be included in the investment process. However, we’ve found that the ability to utilise ESG research effectively varies dramatically between funds.
“There is a sense that some providers want to tap into the trend without really altering their investment process to incorporate ESG factors.”
Mr Michaelis said advisers should have a checklist.
He added: “It is not enough to stick “ethical” in the title. It is about an investment strategy. My checklist would be: what are the resources you have devoted to it, do they run other strategies or is this the only strategy they run? And can I see a list of the holdings?
“It should become apparent there and then what the recent transactions that have taken place as a result of ESG factors or sustainability analysis are.”
Another indication of the expected pace of the future growth of ethical investmentsis the interest that the Chartered Financial Analyst (CFA) society is also taking in it. The institute is conductinga review of its curriculum to see if it should increase the level content devoted to the topic.