Fund manager engagement is crucial for sustainable investing

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.

Being a fund manager nowadays means doing a lot more than just looking at financial performance of a company  Camilla Ritchie, Seven Investment Management

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.”

She adds: “This is becoming increasingly important with the introduction of [the EU Sustainable Finance Disclosure Regulation], which requires products to be divided into those that do not have any environmental, social or sustainable characteristics (Article 6), light green products that have environmental, social or sustainable characteristics (Article 8) and products that must generally invest in only ‘sustainable investments’ and therefore have a sustainable investment strategy (Article 9).

"If a fund manager wants their fund to be classified as an Article 9 product, they will probably need to do a lot of reviewing and reporting and possibly engaging with the investee companies.”

James Sullivan, head of partnerships at Tyndall, says engagement with companies should always be part of what an investment manager does, and that quite often the information gleaned from a company that has run into an issue can reveal the future prospects for a business, either in a positive or negative way, and provide an advantage for the fund manager.

Simon Holmes, multi-asset investor at BMO Global Asset Management, is another who takes the view that engagement can deliver positive outcomes from both a financial perspective and in terms of ensuring compliance with sustainable investing principles.

He says: “Engagement is, to a large extent, about helping companies to think long term, both in terms of commercial activity and in terms of their impact on society. The reality is the companies that only think about those things for the short term will not be successful.” 

Craig Mackenzie, head of strategic asset allocation at Aberdeen Standard Investments, says engagement is also about ensuring that companies that are sustainable in terms of how they impact society are run properly and with shareholder interests in mind. 

He cites Tesla as an example, a business in which he is invested. He says the company’s chief executive, Elon Musk, “is well known for his maverick approach, including to corporate governance, which is the G in ESG, and that is something we engage on. And more broadly, the area of the economy Tesla operates in – electric vehicles – has been full of new entrants who barely have a business plan and are just trying to ride the hype. Looking at governance is part of the way we ensure we are not invested in those".

Mackenzie adds: "I run a multi-asset sustainable fund, but on issues around engagement I can partner with other managers within the firm to engage with companies, giving us bigger scale."  

Fund buyers can also get outside help with their assessments of companies and funds through the use of external ratings agencies. Rathbone's Elliott describes ratings provided by external providers as “a useful tool” but they should not be the only consideration. 

Andrzej Pioch, multi-asset investor at Legal & General Investment Management, says at present the ratings produced by different agencies about the same asset diverge so drastically that it is difficult to rely on external ratings as part of a process.

David Thorpe is special projects editor at FTAdviser