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Our latest thinking on responsible investing


From the outside looking in, sustainable investment analysis may seem like information overload. Amid all of the data, is it possible to see both the forest and the trees? Rathbone Greenbank deputy head of research Kate Elliot says yes.

Every once in a while, I need to immerse myself in nature. Like anyone else, the trappings of the modern world can feel a little overwhelming at times, be it parenting, Zoom calls, or simply braving  B&Q on a rainy Saturday afternoon.

Sometimes nothing clears my mind and recharges my batteries better than finding a quiet trail in the countryside where I can escape the noise and business of the city. It’s the simplicity of it that I like – especially after a working week spent trying to make the complicated seem straightforward.

I imagine many investors might feel overwhelmed by the information being thrown at them, particularly on the sustainability side of things. For starters, no one can decide what to call it. Is it responsible investing? Sustainable investing? Ethical investing? Impact investing? Talk about a big hurdle to clear before we’ve even got started.

Then there is the question of how anyone determines if a company can be considered truly sustainable. There are so many variables and criteria, you’d be forgiven for not knowing where to begin or how to make sense of it all.

If you spend too much time looking at all of the individual parts in isolation, you can quickly lose track of it all and you won’t be able to see the wood for the trees. You need to step back and take in the bigger picture.

There is an increasing quantity of data and metrics for determining a company’s sustainable investment credentials, ranging from carbon emissions to governance and corporate culture. Our sustainability and Environmental, Social, and Governance (ESG) framework includes 30 top-level criteria and then a further 300 sub-criteria that we can choose from when assessing the sustainability credentials of a given company or entity.

We filter out the noise and decide on the most important issues given our understanding of a company’s activities and the industry in which they operate. The information we collect is then run through an algorithmic process that generates a score for each company on each issue that we assess.

But we don’t just blindly follow the numbers – this ranking system helps us determine a company’s sustainability strengths and weaknesses, but just as important is our overall assessment of corporate culture and its commitment to sustainable development. Many companies talk the talk and produce mounds of data and reports designed to convince the world of their achievements, but quite often once you scratch the surface it becomes quite clear they aren’t walking the walk.

So, by looking at how a company is managing environmental, social and governance issues we can get a good idea of whether or not it is appropriate for a responsible investment portfolio. And it’s important to take a holistic view. Of course, it’s great if a company has moved to fully renewable energy and built a sustainable supply chain, but what if it also has a negative corporate culture and is known for serious health and safety breaches – how do you balance these different aspects?

Some critics suggest that bundling ESG together in a single fund results in a lack of focus and instead they should be tackled individually. The theory goes that if you want to invest in companies that are friendly to the planet and will help to reduce pollution, focus on the E in ESG, while if you want to invest in companies that will perform well financially, focus on the G, and so on.

The problem with that thinking is that it suggests the three are not connected in any way. Sure, a company does not need to be sustainable to have good corporate governance, but that isn’t the point of responsible investing. Our aim is to build investment portfolios that contribute to sustainable development and you can’t do that by focusing on a single issue in isolation. For example, you’re not going to solve climate change without looking at food and nutrition, inequality and water security.

We could focus entirely on the environmental side of ESG, but that will mean directly ignoring at least half of the 17 Sustainable Development Goals, and indirectly undermining many of the others. This is why we think it makes sense to take a wider view. Of course, individual companies or entities might be focused on a particular issue, and that’s fine, but we need to make sure that their activities or business practices aren’t causing harm in other areas.

In an ideal world, companies would work this out themselves and focus on operating as responsibly as possible. But that doesn’t always happen and so investor engagement is hugely important in shifting the dial. If investors like us didn’t prod companies and their management teams to up their game across a range of sustainability issues, then I doubt ESG would have made as much progress as it has so far.

The snowball effect

Fund manager David Harrison explains how the UN Sustainable Development Goals, which began life as an aspirational target for governments around the world, transitioned to an unofficial framework for ESG investing. But can they really make a difference?

If you are a sustainable investor, there’s a strong chance you’ve heard of the United Nations Sustainable Development Goals (SDGs). They’ve become synonymous with ESG investing to the point that the uninitiated may think you can’t have one without the other. After all, nearly every manager of responsible investment funds mentions the SDGs somewhere in their process.

In a way, the SDGs have become a byword for sustainable investing. Yet you may be surprised to find they were never intended to serve as a standard for ESG investing. When announced in 2015, they were designed as a global blueprint for all countries around the world to improve health and education, reduce inequality, spur economic growth, protect the environment and tackle climate change.

At the core of the UN SDGs are 17 main goals with 169 targets that are meant to be achieved by 2030. It didn’t take long for financial companies and investment managers to realise these goals could serve another purpose: they can help identify companies that are contributing to achieving those goals.

There’s a simple reason for this. Economic activity around the world is driven primarily by companies large and small, and as a result their behaviour will be critical for achieving many of the UN’s goals. As investors, we can influence corporate behaviour by screening for companies that are making a positive contribution to the SDGs and engaging with management teams.

"As investors, we can influence corporate behaviour by screening for companies that are making a positive contribution to the SDGs and engaging with management teams."

In short: it’s a good way to determine if companies are doing the right thing and hold them to account if they are not. And in the absence of any other set of standards for measuring a company’s track record, the SDGs are so far the only global framework that allows us to compare a European industrial company with a US bank or a Japanese investment company.

We now have other tools and standards to help us with these tasks, many of which were the result of investors embracing the SDGs. One example is the EU taxonomy for sustainable activities. This helps us to understand how a company makes its money, which revenues are green and which are, for lack of a better word, brown.

The big question on many people’s minds is whether investors and asset managers alike can actually make a difference here. We can, but I say this knowing that achieving the SDGs will take collaboration between governments and businesses alike. As a sustainable investor, I take stewardship seriously and am actively engaged with the companies I hold in my fund. Through meetings with management and shareholder voting, I can have an influence on a company’s strategy and help shape its sustainability agenda.

At present, we know that the level of government investment dedicated to achieving the SDGs is not enough to achieve them by 2030. Cost estimates vary depending on who conducted the research, but the International Monetary Fund estimates that the public and private sector will need to spend an additional 14% of global gross domestic product each year between now and 2020 to meet the targets.

"At present, we know that the level of government investment dedicated to achieving the SDGs is not enough to achieve them by 2030."

The private sector has a major role to play here, and we can already see the fruit of our labour. Through engagement and ongoing open dialogue, companies are moving faster to reduce their emissions, clean up their supply chains and make the transition to a low-carbon economy. This is not only the right thing to do, but if companies are to continue to attract investment from a public that is increasingly focused on sustainability, then short-term fixes won’t suffice. Instead they need to drive change by conducting business in a way that makes a positive contribution to society and the environment.

We know it’s a major undertaking and that the road ahead is uncertain, but it’s clear that we are moving in the right direction. It’s not just governments and companies that are paying more attention to sustainability issues. People are behaving differently. Much is said about the younger generations having a greater concern for the environment and their community, but I have noticed a shift across all age groups. Bit by bit, people are more aware of the impact they have on the world and are changing their behaviour for the better, which includes taking a greater interest in how their money is invested. The fact that we have seen such a dramatic upswing in sustainable investing in the past few years gives me some encouragement that we are on the right path.

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