How to plot a course to better long-term returns

Mark Fawcett

Can responsible investment help advisers plot a course to better long term returns for their clients? 

We have just celebrated Good Money Week, an event that encourages consumers to make sure banks, pensions, savings and investments are looking after their money properly.

It wants people to check whether their money is being used ‘in ways that benefit you, society and the environment.’ 

Article continues after advert

One of Nest's investment beliefs is that, ‘As long-term investors, incorporating environmental, sustainability and governance (ESG) factors is integral to the investment management process.’ Our main driver for this is the financial outcomes for members.

For Nest, considering environmental, social and corporate governance risks and opportunities, combined with being an active investor is part of how we make the most of members’ pots.

Integrating ESG into our investment processes is one of the means we deploy to grow members’ money over the long term. We detail the four key objectives that guide and prioritise our activities as a responsible investor in our recently published report Working for Change. 

In order, these aims are: 

1) Better risk-adjusted return: We want to target an improvement in ESG performance where there is evidence that doing so can lower the amount of risk needed in order to achieve a return.

2) Better functioning markets: We want to improve how markets operate and are regulated in jurisdictions where we invest.

3) Support long-term wealth creation: We want to encourage the companies we invest in to deliver sustainable and stable performance to support good returns for our members over many years.

4) Manage reputational risks: We want to protect Nest's reputation and increase our members’ trust by encouraging companies to act in ways our members can feel confident about.

Nest developed a prioritisation model driven by these objectives. This model helps us to make sure we use our resources effectively when considering which issues to focus on in order to improve risk-adjusted returns for our members.

When it comes to being an active and responsible investor, there are potentially thousands of issues schemes could focus on. We need to know how we can prioritise our activities to best serve members.

Our model has identified four broad areas where we analyse company performance. We score companies’ records on environmental issues, social impact, governance issues and financial performance.

The model tells us how much of each area contributes to the risk of each company. It also helps us focus on managing the key risks our portfolios are exposed to. 

Currently the key ESG risks in our equity portfolio we’ve identified using the model, in order of priority, are:

  • How companies treat the environment - we’re addressing this through a focus on companies’ greenhouse gas emissions that contribute to climate change.
  • How companies interact with others – we’re addressing this through a focus on conduct, culture, and staff reward and progression that contribute to employee well-being and productivity. 
  • How companies lead and organise themselves - we’re addressing this through a focus on audit and dividends that contribute to public and investor confidence and trust.

I believe events such as Good Money Week can prompt advisers to think again about the financial outcome motivation for investing responsibly and sustainably.