Figure 1: While similar, sustainable investing is conceptually different from other approaches – it should generate competitive investment returns, while making a positive impact on the world
What it isn’t…
At the end of the spectrum is philanthropy, which is usually focused on very wealthy people or institutions that want to ‘give back to society’. The key is that while the social or moral returns may be high, the investment returns are zero (beyond tax breaks). Philanthropy can have an amazing social impact, but it isn’t investing.
The link is impact investing, which previously had a niche, but important role between philanthropy and sustainable investing. It described investment that offered sub-market returns, but enabled projects or products that had significant social benefits – sub-market investment returns were compensated by philanthropic ‘impact’. The key was additionality, which described the benefit to society that happened only because someone was prepared to give up investment returns.
Then marketing got hold of the term. It has now been hijacked as funds lay claim to the aggregate ESG impact of all of their holdings. There’s so much hyperbole and double-counting that, in my opinion, ‘impact investing’ has become meaningless. These effects would often accrue without the fund’s investment: there’s no additionality!
For us, sustainable investing has three core principles:
Financial returns – this is the point of investing and we believe it’s entirely complementary to the other two factors. Well-managed companies by ESG metrics are likely to be financially well run – in basic terms, sustainable investing improves returns.
Social and environmental improvement – we believe companies that address social issues or environmental challenges through innovation are more likely to succeed over time.
Engagement – no company is perfect and after investing we will engage with them to make the case for higher standards or a different approach. Not only does this help to make society better, it can improve financial returns by highlighting problems in advance.
The significant head start we have over many of our competitors means that we’ve had time to develop a differentiated investment process based not just on data-driven models as ESG data standards are poor.
Overall, we aim to invest in companies demonstrating a net benefit to society, through either the products and services they offer or ESG leadership. As a result, we invest in a range of innovative, responsible, well-managed companies with strong long-term growth potential.
Two funds, a decade of delivery
Two of the funds in the suite of sustainable funds available at Royal London Asset Management celebrate their 10 year anniversary this year. You can find out more about the Royal London Sustainable Diversified Trust and Royal London Sustainable World Trust as well as our full range of sustainable funds at rlam.co.uk/sustainable.