Ethical Investing – ESG – Sustainable Investments
Socially responsible investing covers a broad range of issues. It’s a nuanced area and hard to nail down in a single blog post. It’s much better to chat it over face to face.
Do you exclude certain sectors?
Do you invest in so-called ‘sin stocks’ and rely on the investment manager attempting to change the company from within at shareholder meetings? For example Blackrock and Vanguard engaged with gun manufacturers they invest in following the Stoneman Douglas High School shooting last year.
An interesting article appeared in the BBC website on the 16th April referencing Legal & General’s approach. “… Royal Dutch Shell is the UK’s biggest dividend payer by miles – offering investors a tempting 5.8% return on their money. Legal & General say they were successful in moving the chief executive’s performance targets to be based on safety and environmental improvements rather than raw profit. They were less successful in tackling the sheer amount he pocketed last year – a colossal £17m.”
“The world is facing a climate catastrophe and businesses around the world must address it urgently or face the ultimate sanction for a public company, shareholders who refuse to back them any more.
That is not a message from an environmental action group but from the largest money manager in the UK, Legal & General Investment Management, which manages £1 trillion worth of UK pension fund investments.
Its climate warning was the top of a list of concerns about the way companies are run.
Other red lights included the level of executive pay, lack of diversity in senior corporate roles, the role (and cost) of political lobbying and the poor quality of the financial information provided by auditors.
Legal & General insist that it is not just virtue signalling.
The company voted against the re-election of nearly 4,000 directors in 2018 – an increase of 37%. That included votes against over 100 board chairs on the basis of gender diversity alone.
Legal & General’s director of corporate governance, Sacha Sadan, said it was getting tougher with company boards and managements.
“2018 was a record year for us as we continued to engage with companies on a broad range of issues, using our voting power to influence change on behalf of our clients. The increased figures reflect the higher standards we expect companies to adhere to”
So back to us at Gibson Financial Planning – ESG (Environmental, Social and Governance) investing is a type of sustainable investing. ESG funds are designed with the view of delivering positive returns while mitigating the risks of unsustainable business practices.
We have an ESG portfolio range invested in a number of ESG-targeted funds. The funds are managed to be overweight corporates abiding by standards relating to pollution, water-intensity of operations, gender equality, managerial compensation amongst other common ESG factors. This means that no industry or vice can be said with certainty to be excluded from a fund.
A common approach in construction of an ESG fund is to remove a certain percentage of equities that abide the least by ESG standards, which are generally judged using ESG scores ranging from 0 to 100 (an example of a frequently used scoring system being Morningstar’s Sustainability score).
Interest in these strategies has increased significantly in recent years. According to the US SIF Foundation, of the $40.3 trillion of total assets under professional management in the United States in 2016, $8.1 trillion is invested in ESG portfolios. That represents a 30% growth rate from 2014 when such assets totaled $6.57 trillion.1
Additionally, The Morgan Stanley Institute for Sustainable Investing found, after reviewing performance data from 2008 to 2014 of 10,228 open-end mutual funds, that sustainable funds tend to exhibit slightly higher returns and lower volatility than their traditional counterparts, barring a few exceptions.2
ESG funds are screened from the FO Equity – Ethical sector which sits within the FCA-Recognised fund universe and screening criteria, using criteria which are consistent with those applied to our non-ESG funds (see screening process document).
In summary, the objective is to create ethical portfolios that meet sustainable investing principles and capture market returns over the long-term.
1. US SIF Foundation’s Overview of Sustainable, Responsible and Impact Investing in 2016, available at http://www.ussif.org/content.asp?contentid=40
2. “Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies,” a white paper published in March 2015 by the Morgan Stanley Institute for Sustainable Investing