InvestmentsOct 6 2022

How ESG processes are evolving

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Rathbones
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Supported by
Rathbones
How ESG processes are evolving
(David Clode/Dominik Dvorak/Pexels/FTA montage)

Clients that are focused on sustainable investments are becoming more “sophisticated”, according to Kate Elliot, head of ESI research at Rathbones Greenbank investments.

She says clients usually do not want issues looked at in silos when considering environmental, social and governance funds – that is, some parts of a portfolio dealing with the E, some with the S, and others with the G in ESG.

Instead she says providers will have to focus on creating funds that are capable of addressing all of those issues if they want to “stay relevant”.

She notes part of the change is that clients are increasingly focused on ESG metrics that are “harder to quantify than are the environmental metrics.

"This is particularly the case in some of the social impact priorities, and so our focus now is now on that area.

The rise in sustainable funds seen over the past few years has made investing in some of the more traditional themes more challenging.Duncan Goodwin, Premier Miton

"Human rights due diligence can’t really be boiled down to a single data point. So it becomes a balancing act between using as many data sources as possible, but also to use company meetings as a way of finding out how a company views social issues. It is also an area where there is quite a lot of subjectivity, and so there is a spectrum of approaches.”

One approach Elliot highlights is to study and monitor the evolving academic research in various areas, to ensure that one is in touch with the latest thinking on a particular topic. 

Jake Moeller, senior investment consultant at Square Mile, says the key is that fund managers are able to access an ever-expanding collection of academic and also peer group research, combined with legislative and regulatory changes, to have a constant stream of ideas on how to update processes.

But Nathalie Wallace says the academic research is “describing the 'why' we should do something, rather than the 'how' we should do it.”

Kate Elliot, head of ethical, sustainable and impact research at Rathbone Greenbank Investments

          

 

We are gaining insights from charitable organisations now which could be valuable in the future.

 

 

 

Duncan Goodwin, who runs the Premier Miton Global Sustainable Growth fund, takes a different approach.

He says he prefers to look at the work of early stage companies in the various sectors as these are a source of innovation.

Goodwin says: “The rise in sustainable funds seen over the past few years has made investing in some of the more traditional themes more challenging given our approach and valuation discipline.

"Some of the larger, more recognisable, technology companies would be a classic case in point – an area where we currently have limited exposure. While our process has remained largely unchanged over the years, the opportunities presented constantly evolve.

"Our focus on nascent, potential industry disruptors means we see a constant stream of potentially game-changing companies. While we are selective in the actual investments we make, this approach helps us in keeping abreast of new and emerging technologies and business models.”  

Regulation

Narina Mnatsakanian, executive director – sustainability centre at Van Lanschot Kempen, says processes are evolving in line with the regulatory frameworks, and that the way one can influence the regulatory outlook is by being part of industry committees. 

Sandra Crowl, head of stewardship at Carmignac, provides a practical example of this. She says regulators have begun to focus more on biodiversity issues in recent years, and this is feeding through to the products coming to market.

An example of these processes is the recent announcement from JO Hambro Capital Management that it is linking with the University of Exeter to create a partnership to collaborate in research and executive education around sustainability issues. 

Outlining the aims of the partnership, Andrew Parry, head of investments at Regnan, which is the sustainable investing arm of JOHCM, says: “We’re delighted to agree this partnership with University of Exeter.

"They are at the forefront of research into climate change and other issues around sustainable systems, supporting this research and ensuring our investment teams remain at the cutting edge of sustainability is crucial to our clients.”

Tom Sparke is investment director at GDIM

 

 

We will use funds with the most impactful positive factors wherever possible.

 

 

 

 

Elliot says she also builds links with charitable organisations as many of those have insights into issues that “may not be investible today, or for 10 years, but we are gaining insights from them now which could be valuable in the future.

"By looking at these issues at quite an early stage, we are also better able to understand who will be the leaders in those fields in the future, when perhaps they are at the stage where we can invest in them.”

Tom Sparke, investment director at GDIM, a discretionary fund house that works with advisers to construct ESG portfolios, says advisers do ask him questions around how his processes keep up with the latest client concerns in the ESG space.

He says: “We use a ‘best endeavours approach’, which means we will use funds with the most impactful positive factors wherever possible.”

Minesh Patel runs EA Financial Solutions, an advice firm in London. He says the start of the process with any client who has ESG as a priority is to use the fact-find to understand which areas of ESG is a focus for them.

The thing to be mindful of with those thematic funds though is they tend to perform differently depending on the economic conditions.Minesh Patel, EA Financial Solutions

He says: “ESG is a very general term, and it does not always help when a fund is just labelled ESG as that can lead to a lot of greenwashing. But where the labelling is more clear, for example, if it has sustainability in the name of the fund, that is telling us where the fund is focused.

"We also use thematic funds, such as renewable energy or water funds, for clients who may have that as a priority. The thing to be mindful of with those thematic funds though is they tend to perform differently [from each other] depending on the economic conditions.

"For example, renewable energy funds do well when the economy is doing well, whereas water funds tend to be more resilient to economic conditions. And those factors are important when considering a client’s attitude to risk.” 

One of the challenges of investing in some of the non-environmental aspects of ESG is that it can be harder to quantify, or measure, factors such as social impact, which can also be more subjective. 

Vincent Berard is head of product strategy at BNP Paribas' Theam Quant fund range. As the title of the range implies, they use quantitative measures to assess the investment case for stocks.

Berard acknowledges that assessing the social impact is more difficult, “but using the UN Compact rules, for example, on various aspects of ESG immediately eliminates 20 to 40 per cent of global stocks from an ESG fund, depending on the mandate.

"We also partner with transnational organisations who measure various social factors and provide data.”

david.thorpe@ft.com