Ethical investing is having its moment

This comes at a time when high-profile campaigners, such as Greta Thunberg and Extinction Rebellion, continue to heap pressure on governments to take climate change more seriously.

A survey conducted by the Investment Association, published in mid-September, highlights just how popular the theme is becoming with intermediaries and investors.

The IA found that, last year, just over a quarter (26 per cent) of the UK’s assets under management were invested using a socially responsible strategy.

“Almost all of those firms which are investing responsibly were integrating environment, social and governance factors in their investment processes,” the IA said.

The report also listed four factors that are likely to continue the debate:

• The scale of concern about environmental change and its implications, probably the most potent theme at an international level.
• A growing expectation that private finance should support projects aiming at positive social impact.
• Stronger expectations of what the investment management industry can achieve in key areas of corporate oversight and holding companies to account. These include executive pay, improving board and company diversity, audit quality and long- term investment, as well as broader behaviours that may negatively impact corporate and wider economic sustainability. Recent corporate governance scandals in the UK have turned the spotlight on the responsibilities exercised by, or on behalf of, institutional investors.
• The question of corporate oversight in turn raise questions about ‘stakeholder voice’ and the extent to which mechanisms are developed to ensure that corporate decision-making is not just focussed on shareholder value but more representative of the wider society, including employees, suppliers and customers. In the UK this theme has featured in policy discussion on both the right and left of the political spectrum.

So how is the fund management industry responding to this demand?

Leon Kamhi, head of responsibility, Hermes Investment Management, explains that this is occurring in two ways.

Thematic funds

He says: “Firstly, there are a number of thematic funds being developed which allow investors to invest in sectors and issuers which reflect their values.

"Secondly, and reflecting the majority of the funds we offer, a fund can be both responsible and mainstream in that the manager integrates ESG and impact considerations alongside traditional performance criteria to make investment decisions and uses stewardship and engagement to improve the investee company’s sustainability performance.”

There are a number of thematic funds being developed which allow investors to invest in sectors and issuers which reflect their values Leon Kamhi, Hermes Investment Management

Rathbones launched its Global Sustainability fund last year, adopting a multi-cap approach.

Manager of the fund, David Harrison, explains the focus is on investing in high quality businesses that have “strong heritage in the sustainability space, both from a research and investment perspective.”

This means that he meets with up to 300 companies a year, as a well as reviewing existing holdings. “We only want to own companies that are ‘walking the walk’ in terms of sustainability.

"We spend a lot of time engaging with management teams, really trying to understand why sustainability drives their business and ultimately how that is going to deliver long-term shareholder returns.

"Meeting senior management teams when talking about sustainability is vital. I will often ask a chief executive to explain how sustainability influences capital allocation in their business.

"I also want to know how strong is the commitment to sustainability, and how is it quantified over the long run,” he says.

Investment opportunities

In terms of the opportunities this presents, Mr Harrison adds that there are significant changes in the infrastructure space, as communities become more urban and reliant on digital technology.

“How infrastructure is designed and built continues to evolve,” he says.

“This creates significant opportunity for a company like Ansys, a business that focuses on simulation software.

“Simulation software has, to date, been used in limited applications because of its cost and complexity. Ansys has engineered a product that is easier to use and more accessible.

“The idea is that you can simulate what a product will look like and how it will behave before it is built, thus saving time and money.”

Other key developments, according to Mr Harrison, include demographic shifts and continual improvement in global health standards, which are a significant opportunity for many medical technology companies.

“Diasorin makes diagnostic equipment for a number of niche diseases and conditions.

“Management are clear on their focus on niche areas. Like with many of our other companies, it invests significant capital in developing its own products, which helps drive new orders and grow market share.”

In addition to this, there is also growing evidence to suggest that companies with higher ESG scores tend to have a lower cost of accessing capital leading to higher profits.

Steve Kenny, commercial director, Square Mile Investment Consulting and Research, explains that he is seeing greater use of ESG to improve the selection and ongoing monitoring of securities, and the funds where an ESG approach is used covers the spectrum of asset classes and vehicle types.

 “While there has been a prolific increase in the number of funds which have explicit ESG objectives, we are increasingly seeing funds which are not mandated to follow a responsible investment process but are nonetheless integrating ESG as a hygiene factor in recognition of the positive impact it can have on corporate performance and risk mitigation.”

craig.rickman@ft.com