TALKING HEADS: INVESTING FOR A BETTER FUTURE
As investors of all ages look to make an impact with their money, Jennifer Hill talks to a range of investment professionals – from advisers to wealth and fund managers – about how the space is evolving
The world around us is changing and impact investing – generating financial returns while making a positive contribution to society – is gaining momentum.
While millennials remain the driving force behind this rapidly growing movement, 15% of all investors recently surveyed by Barclays have made an impact investment, up from 9% in 2015.
Here we talk to six investment professionals about the trends they are seeing and how they are adapting their proposition to meet growing demand.
London-based Mulberry Bow has recently become a member of the UK Sustainable Investment and Finance Association and has set sustainable investment as one of the core themes for client education initiatives in 2019. A number of the firm’s partners have committed their own money to impact investments, among them Gosia Rosa.
‘Until recently, sustainability rarely came up in client discussions,’ she says. ‘Since interest in the subject has picked up, even clients who are purely seeking good returns are openly considering sustainable investment opportunities. Although female and younger clients tend to place greater importance on sustainability and ethical, social and governance [ESG] factors, clients across the whole spectrum are starting to become interested.’
Gosia is ‘excited to see that financial industry has finally woken up’ and recognised the need to offer a broader range of sustainable financial products beyond listed equities.
‘For instance, Multilateral Development Bank debts have historically offered strong risk-adjusted returns. Despite that, it has been difficult to incorporate them into the portfolios for private clients. This is now changing.
‘We hope that with time, the availability of high quality, diverse sustainable investment products offering high returns will continue to increase and clients will be able to have their (organically grown, free trade) cake and eat it.’
Castlefield has specialised in ‘responsible, ethical and thoughtful investing’ since it was founded in 2002.
London-based partner John Ditchfield believes sustainable investing has moved centred stage over the past few years – with much greater interest coming from both institutions and private clients – due to a growing awareness of environmental issues, such as plastics in the oceans and climate change, and a steadily increasing number of funds and products that demonstrate good financial returns while being committed to promoting sustainability.
‘It’s often said that this change is driven by younger people, but I don’t agree; I think a very wide range of people want to invest in this way,’ he says.
In response to rising demand, the investment and advisory firm launched the Castlefield B.E.S.T Sustainable Portfolio fund in March. It is a multi-asset, multi-manager fund that draws upon a proprietary investment selection system that assesses companies based on what it sees as the four key drivers of long-term returns: business strength, environmental friendliness, social good and transparency.
The fund offers access to investors with modest sums to invest – lump sums of a few thousand pounds or regular savings of £50 per month. ‘We are trying to democratise sustainable investing by making it more accessible,’ adds John.
Leicester-based wealth manager Mattioli Woods favours fund managers that have a keen eye on a company’s ESG profile. Its core client offering is a range of multi-asset funds, but it has also invested in funds with an expressly ethical mandate where it believes them to be the best on offer within the broader universe.
Its ethical portfolio invests in ‘dark green’ funds that avoid areas like oil, defence and tobacco.
‘Although we understand that personal ethics are highly subjective, we do our best to offer a service that excludes investment in the main areas to which we find our ethically-minded clients have objections,’ says investment analyst Lauren Wilson.
She points to the world becoming more progressive over time – and to shareholders rewarding forward-thinking companies.
‘Certain states in Australia only decriminalised homosexuality in the late 90s. In 2018, businesses like RBS, Costa and Barclays are clamouring to support Pride events,’ she says.
‘We’re also only just beginning to see how potentially lucrative a move towards compassion for animals and their environment could become. A great example of this was in July when Starbucks’ shares rose by 1.9% the morning the company announced plans to phase out plastic straws from its coffee shops worldwide by 2020.’
CATHEDRAL FINANCIAL MANAGEMENT
One-fifth of the funds on Cathedral Financial Management’s panel are ethical. It is an area that is increasingly attracting the interest of its clients – a trend expected to continue.
Shane Bennett, a research analyst at the Exeter firm, attributes this to greater understanding of the benefits of sustainable investing. Contrary to the once popular belief that ethical investors had to sacrifice performance, companies with strong ESG polices can produce superior performance.
‘Companies with a robust ESG policy are more likely to improve energy efficiency, minimise waste and are generally at lower risk of litigation – all of which can improve the bottom line,’ says Shane.
Cathedral runs a balanced ethical discretionary portfolio and struggles to find property and other alternatives funds to use as diversifiers within this; they often fail to meet the ethical criteria. Instead, the company blends a number of different sustainable investment strategies.
Shanes points to a growing choice of funds. While traditional funds use a combination of negative and positive screening to select holdings, more recent launches focus purely on positive factors.
‘Encouragingly, I see more strategies incorporating engagement in their overall process – working with companies to build upon their ethical practices,’ he says.
HERMES INVESTMENT MANAGEMENT
Interest in the long-term sustainability both of businesses and the planet is indicative of a sea change in opinion regarding the role of ESG considerations in investment approaches, according to Tim Crockford, the Citywire AAA rated manager of the Hermes Impact Opportunities Equity fund.
‘No longer is it a case of portfolio managers arguing why they focus on ESG and sustainability issues: they must now justify why they do not,’ he says.
The fund has grown to million (£128 million) since it launched in January, with demand coming particularly from UK wealth managers focusing on a younger demographic.
Tim regards it as the third generation of responsible investing, following on from strategies that adopt ESG criteria and socially responsible investing (SRI) funds that screen out negative factors, such as tobacco or arms.
The fund seeks to invest in companies that address the unmet needs of society as defined by at least one of 17 United Nations sustainable development goals.
‘The concept of sustainable investing is becoming more popular, but is far from being universally understood and it is our belief that education on the different types of sustainable-branded products is key to help investors find strategies that meet their goals,’ adds Tim.
Exeter-based Seabrook Clark has been offering an ethical portfolio as one of seven investment models since it was set up in 2013. This year, it is developing its investment proposition by remodelling its existing ethical portfolio into an ESG portfolio.
‘When making our investment choices we aim to select funds that achieve a balance between consistently strong performance, screening out unethical investments and supporting sustainable businesses,’ said investment assistant Veselina Petrova.
‘Our portfolio has exposure to clean energy, waste, pollution and resource management, and avoids alcohol, armaments, gambling, pornography and tobacco amongst others.’
Whereas ethical considerations were often seen as a niche area among investors, she points to ESG now being ‘very much part of the mainstream’.
‘We see a clear rise in demand for sustainable investment solutions. More than half of that demand comes from millennials. This generation is becoming increasingly concerned with ethical issues such as animal cruelty, climate change and labour rights,’ says Veselina.
‘We believe sustainable investment will continue to move away from being defined by what it does not invest in and focus on investing in “positive impact” businesses that help tackle issues such as climate change, air pollution and water scarcity.’
Jennifer Hill is a former deputy money editor of The Sunday Times, personal finance correspondent of Reuters and personal finance editor of The Scotsman.
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