A major challenge faced by advisers seeking to develop a sustainable investment portfolio for clients is the constant evolution of the narrative.
New issues are being highlighted by investors and clients constantly, and there is the danger of a holding that was once compliant with sustainable investment priorities becoming the source of controversy as the understanding of the impact a business has on wider society becomes clearer.
An example of this is clothes retailer Boohoo, which became embroiled in a dispute about the labour practices at some of its suppliers in Leicester.
It had been held in several sustainable investment portfolios at the time of the controversy, with investors focusing on labour rights issues in the emerging world, rather than domestically. The company has since committed to reform its practices.
Stewardship
One of the ways providers can adapt their mandates to the change is by using engagement and stewardship.
According to Kate Elliot, head of ethical, sustainable and impact research at Rathbone Greenbank Investments, stewardship is something that has become surrounded by myth.
She says it is not correct that it is merely a way for some investors to buy stocks that are not sustainable on the basis that their stewardship will help them make companies sustainable in the future. Elliot says that in fact stewardship is something much more substantial.
She says: “It's an important part of our role to push companies towards best practice, but they must also be ESG-screened as well. Even leading companies that are run sustainably have to keep abreast of the latest risks and opportunities.
"We see our role as to be a critical friend. For example, climate change risks have become mainstream investment thinking, but now social [impact] is coming to the fore. People identify it with voting at annual general meetings, but there is more in the toolkit than that.
"It can also be informal; for example, we have been engaging a lot with social landlords about tenant wellbeing and the quality of the accommodation, and now the providers are seeing that we are interested in this, and so are starting to gather data on it.”
Chris Hiorns, head of multi-asset strategies at EdenTree Investment Management, says: “Engagement is an absolutely crucial part of running a sustainable fund. It is about really understanding how a company works. And if there is negative news associated with a company, the first step is to engage and find out what went wrong, and what is being done to stop it happening again.”
A harder job for managers
Camilla Ritchie, senior investment manager at Seven Investment Management, says: “Being a fund manager nowadays means doing a lot more than just looking at financial performance of a company and deciding whether the share price looks cheap. Investors are demanding that their funds are managed in an environmentally sound manner, that employees are treated well and that the governance of the company is aligned to the interests of the shareholders, among other things.”
