Specialist sustainable fund managers in the UK believe that the stars have aligned for their sector with big shifts in public perceptions.
At the same time, they remain alive to the risk of greenwashing saying that investors need clarity and managers have to held to account for what they are offering.
The managers set out their views at a recent round table organised by the Share Centre.
Ben Constable-Maxwell, head of sustainability and impact at M&G says he sees a genuine alignment of the stars.
He says: “The consumer, customer, citizen and societal perspective is a massive game-changer. Whether that is Greta Thunberg, David Attenborough or Extinction Rebellion, there are a range of factors about climate or ESG that are coming to the fore.
“There is also changed accessibility of information. We know where our T-shirt gets made or our coffee is sourced. That will have a growing impact in the future, although that awareness has not translated into pressure on M&G and the way we deliver funds yet in the way we think it will.”
He says that regulatory change is massively important too.
“Companies are facing huge amounts of pressure to deliver and be more transparent. Transparency is the mechanism being used. There is an increasing view that sustainable investing is a better way to invest. It improves risk adjusted returns and better information results in better decision-making.
“There is an increasingly consumer view that sustainable investing works, lots of studies are showing better ESG can improve return on equity, help manage volatility and lower the cost of debt. That is the alignment of stars.”
Esmé van Herwijnen, responsible investment analyst at EdenTree Investment Management says: “Like any other product which customers are buying, they are becoming more interested in the impact of what they are buying.
“With coffee, you can have rainforest alliance, certified organic or fair trade coffee and with investing you have ethical screened, impact funds, sustainable, ESG integrated. It adds to the vibrancy of the market. But as with labels for coffee, you need to know what it means. I would ask does the end customer understand – with all these products popping up – what is happening with those investments?”
Companies do not want to see their model marginalised
David Harrison, manager of the Rathbone Global Sustainability Fund, says: “Compared with 10 years ago, more companies realise there is the economic benefit of thinking sustainably, not just from the bottom line or the reputational aspect. Renewable energy can lower the cost of energy input. It can improve their profit margins. More realise if they think sustainably it can give them better pricing, and it reduces the risk of companies being marginalised, because we are seeing whole industries being marginalised.
“The companies we meet realise they have to think sustainably, or their business model might not be around in future.”
Neil Brown, fund manager with the Liontrust sustainable investment team, says: “What has worked for us is the move from values to value as the consumer has moved their wallet and there are more investment opportunities.
“When companies see the opportunity to outperform by behaving the right way – by treating their staff and their suppliers the right way by selling more products, funds access those businesses and the funds perform well. At that stage you are losing reasons not to. Why would you want a company that is facing uphill battles and that is selling less each year?”
The managers say the days of sacrificing performance for ethical reasons are now behind the industry.
Brown says: “The old story of performance or sustainability does not apply anymore. We are using sustainability to deliver financial performance.
“There has been huge amount work on the plumbing of sustainability. It is hard to engage a retail investor in the fact that the integration of ESG factors into the P&L is a huge aspect of what we do now. But we are breaking out how companies make money, identifying core drivers of value and mapping ESG on to those.
“We do this where believe we can make money. This again shows the move from values to value – there is money to be made in treating people the right way and treating the environment the right way.”
Constable-Maxwell adds: “I think people were seeing sustainable investing as something that automatically reduced your returns. I don’t think that is the case anymore. ESG investing is now a framework for helping investors make better decisions.
“Going back 35 years, in terms of the S&P 500, the value split in tangible and intangible assets was 85% machinery, plant factories, real estate and 15% brand, reputation and IP. Now 85% of the value is in intangibles. ESG if nothing else is a framework for thinking about those values given that companies are now about reputation, brand, people, networks.”
Looking beyond the glossy CSR brochures
Brown suggests that although it was often said the governance element was always important, it wasn’t always effectively integrated and that fund managers today are much better at using these tools to understand what a business is doing.
Harrison stresses the importance of sitting down with management teams and asking those questions.
“The management always say we always did this, but we didn’t tell you about it. I would say less than 50 per cent did apply those factors. When you ask a CEO, you see the terror in their eyes if they are not ESG. If they can say this linked to my business, then you can find those real gems.”
Van Herwijnen says: “That is where the relationship is critical, not just asking difficult questions when things are going wrong, but also engaging. That is also why investing for the long term is really important. You can’t influence things if you are only there for a short period. It is complex to get to the bottom of performance.
“Since we started doing responsible investing, there is a lot more information, so many more data points, you can do site visits. All of that is important. But for having the confidence that what they say in the shiny annual report is actually happening, the long-term relationship is really important.”
Brown adds: “Part of the job is getting underneath the reporting. We have all the data. You will never know what is happening in the supply chain. One of the most dangerous things you hear from a CEO is there is nothing’s going on. I want to know what happens when you get a call at night, how do you react, how do you monitor it, what are the systems, rather than hearing, ‘we are perfect and nothing can go wrong.’”
Constable-Maxwell adds: “There is a difference now with ESG ratings. It was a step change and game-changer.”
In addition, while he does mistrust the shiny CSR and ESG reports, they are useful.
“The neat thing is that whether a firm or big or small, it is identifying what the company’s purpose and its vision is. We can ask how aligned is that statement of intention. You can look at the incentives, Capex, R&D. Is it going where the company says it is – in its DNA – or is it going nowhere near that? Is the CEO incentivised to look after employees and engage with the community or is it just returns that they are gaming? You can do that for Shell and you can do that for a tiny biotech.”
The managers then discussed the risk of greenwashing in light of recent reports.
Greenwashing remains a risk to the sector
Brown says: “There is tremendous innovation in the space. That is not a problem though it might feel like one, if you are trying to pin it down and change has been very quick.
“The downside risk is misselling. This needs to be managed. Misselling has a specific connotation, which is not doing what they said they would do. If people set out their stall and they stick to it, then they should be analysed and assessed. If someone is saying they are doing one thing and they are not – that is a risk the market should deal with. But I would hate to stifle innovation.”
Van Herwijnen adds: “There is a risk of greenwashing. That is why it is very important for asset managers to be very transparent about what you do with your process, your screens, criteria and standards for the companies you invest in and how you engage so there are no big surprises.”
