ESG REVIEW 2020
supplement category
Dylan Lobo editor, Wealth Manager
It’s been an extraordinary 12 months since our last annual supplement, but for all that’s gone on, ESG has continued to flourish. In particular, the resilience of sustainable growth stocks during the Q1 2020 market volatility seems to have finally dispelled the idea in investors’ minds that there must be a necessary trade-off between performance and sustainable investing. The other big effect has been to bring the social and governance sides of the equation much more into play. While a good part of the early phase of ESG expansion was driven by the urgency of climate emergency and its very tangible effects, ideas of social inequality, labour rights and corporate governance are now much more present in the minds of the investing public. But at the same time the rapid expansion of ESG as a whole is raising problems for the industry. The imperfection and fallibility of ESG data has been highlighted, most publicly by the recent Boohoo scandal. And asset managers report that new regulation only appears to be muddying the waters when it comes to the ongoing question of unclear definitions and confusing terminology. If these challenges can be addressed – and the onus, as our analysis makes clear, is on the industry itself, wealth managers and asset managers, rather than regulators or data providers – ESG seems set to develop as an increasingly mainstream and essential part of asset management.
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Chapter one
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ESG Comes of age
ESG funds survive the Covid-19 crash test intact
Chapter TWO
The 'S' and 'G' of ESG
Chapter Three
Time to get social: green bonds face tough competition
Chapter Four
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WHAT A DIFFERENCE A PANDEMIC MAKES
ESG COMES OF AGE
chapter one
This year has seen ESG move fully into the mainstream, consolidating its status as the asset management industry’s fastest-growing trend. But at the same time the industry is now playing catch-up on a number of fronts that include data provision, categorisation and regulation. And while so much remains to be dealt with, there may well be further controversies in future as inflows continue to grow. ‘To start with the good news: wealth managers report that clients now seem widely on board with the importance of ESG. ‘Investors are now at the point where they feel a lot more secure with the concept of ESG,’ Louisiana Salge, impact specialist at EQ Investors said. FLYING COLOURS ‘In line with this, sustainable funds have passed the Covid stress test with flying colours, at least in terms of performance and popularity. Buoyed by a general rally for ESG stocks amid the market recovery that followed the first quarter selloff, global inflows into sustainable funds were up 72% in the second quarter, reaching $71.1bn, according to Morningstar data. As a result, assets in sustainable funds hit a record high of $1.1tn at the end of June, up 23% from the previous quarter, again according to Morningstar. Of course, this has not gone unnoticed by the industry, whose rush to capitalise on a tsunami of investor interest saw 125 new launches in the second quarter alone. While the seemingly unstoppable rise of sustainability in investing is clearly a good thing, its ever-expanding scope is inevitably leading to more and more controversies as the industry grapples with a number of questions raised by the ‘mainstreaming’ of what has historically been a niche sector. The latest controversy, which touches on a much wider range of social questions raised by the pandemic, swirls around the business practices of UK fast fashion retailer Boohoo and the Standard Investments, Merian and Premier Investments were among those who held it in their ESG-focused portfolios. Publicly available sources had sounded warnings: for example, the Fashion Transparency Index, which rates the world’s largest fashion brands on how much they disclose about their supply chains, gave a 2020 rating of just 9% to Boohoo, this compares to top performers such as H&M (73%), Adidas/Reebok (69%) and Marks & Spencer (60%). For Quintin Rayer, head of research and ethical investing at wealth manager P1, the issue highlights yet again that wealth investors who have supported it. The company was held in the portfolio of a number of ESG funds, many of whom sold after a Sunday Times investigation into working conditions at factories of some of its suppliers in Leicester. The issue sheds light on the workings of a sector that could ultimately risk being accused of failing to deliver on its marketing promises. Some ratings agencies had given the company a seal of approval: in June, MSCI rated it AA, just one step down from its top score. Aberdeen managers need to ensure fund providers are doing their own due diligence, rather than operating portfolios tilted in line with ESG criteria and with a heavy reliance on ratings agencies. ‘Looking down supply chains is not easy, but in the case of Boohoo there have been red flags for some time, with journalists and other sources pointing towards possible irregularities. In this case, given that the company had long been under scrutiny, it seems almost like wilful ignorance for ratings agencies and fund managers to claim that they could not have known, suspicions should surely have been raised,’ he pointed out. ACCOUNTABILITY For Rayer, one way of moving towards better transparency and accountability could be for asset managers to demand refunds from agencies for ratings that have been shown to be sub-par. ‘Data providers are no doubt charging asset managers a sizeable fee. It would seem plausible that those managers could go back to them demanding a hefty rebate. That might motivate the data providers to do a better job,’ he suggested. ‘I think at the very least, asset managers should be making it clear they take a very strong view of the fact they have been sold data, at great cost, that was clearly not fit for purpose.’ He noted that although nearly all managers claim they use ratings agencies’ assessments only as a starting point, there will inevitably be a cognitive bias created by an authoritative-seeming assessment from a professional agency. The issue also highlights the question of fund manager engagement. Thus far both ASI and Premier have cut their positions in ethical funds. ‘Having spoken to Boohoo’s management team a number of times this week in light of recent concerning allegations, we view their response as inadequate in scope, timeliness and gravity,’ said Lesley Duncan of ASI in early July. All of which, again, raises the question of whether they could have acted sooner.
wORDS By Kathrin Schindler
‘Looking down supply chains is not easy, but in the case of Boohoo there have been red flags for some time, with journalists and other sources pointing towards possible irregularities’
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Quintin Rayer, head of research and ethical investing, P1
Ketan Patel, fund manager, EdenTree
‘A company like Marks & Spencer, Inditex or H&M can say where they have sourced their cotton: the truly fast fashion chains will almost certainly not be able to give assurances that it has been ethically sourced’
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ESG funds have passed the Covid-19 stress test with flying colours, but will scandals such as Boohoo knock investor confidence?
For Rayer, the fact that approaches to engagement and divestiment differ so widely is another area where wealth managers are forced to exercise extreme caution and diligence. ‘We have consulted NGOs on the question of engagement and their response indicated that this was an area of great concern for them. It’s clear that considerable progress still needs to be made in the way that fund managers operate. Again, this places the onus on fund selectors. We wound up devising our own methodology for understanding fund manager engagement. ‘We need to know that managers can show evidence to back up their claims on engagement, that they are able to set clear targets and monitor companies’ progress towards them. In order to understand how they are operating, you need to understand a number of factors, including how well-resourced they are, and how far they are willing to go in terms of moving towards divestment,’ he said. EQ’s Salge agreed that the emphasis is on selectors and wealth managers in what is still an evolving sector. ‘If you are using funds or ratings agencies, it’s vital first of all that you understand their methodology, and understand what they are able to capture and what they can’t,’ she said. ‘It’s important to evaluate how metrics and data inputs are sourced and to understand that they are simply one material input and often don’t give much granular insight.’ Even then, data inputs might fail to capture what a sector does at its core: ‘In our case, we view fast fashion as by its nature unsustainable. Some companies might score better than Boohoo on supply chain transparency, but overall the entire sector has a negative environmental impact. Given the huge competitive pressures on retail prices, it’s only logical that as an industry its sustainability profile is very questionable, and that creates intrinsic risks from an ESG investing standpoint,’ she noted. DRIVING CHANGE Ketan Patel, fund manager at Edentree, agreed that the fast fashion sector has embedded problems, and sees the role of ethical fund management as driving change. ‘If a company like Boohoo or Primark is selling T-shirts for £2 each, the economics are such that it’s only profitable if workers are somehow being exploited across the supply chain, starting from those workers who are being used to pick the cotton for the garment,’ he said. ‘Importantly, a company like Marks & Spencer, Inditex or H&M can say where they have sourced their cotton: the truly fast fashion chains will almost certainly not be able to give assurances that it has been ethically sourced.’ Because of the structure of a cotton plant and the picking process, combined with the fact that much of the world’s cotton is now grown in China and Uzbekistan, the fear is that child labour might have been used, he says. Patel also noted that the damning review into Boohoo’s supply chains – which concluded that reports of poor working practices were ‘substantially true’ – has undoubtedly damaged the international reputation of Leicester and the UK. ‘Most of those who were victimised in this case were from the Asian community, and many were women. The fact that they could be exploited in this way, in the UK in 2020, is a huge indictment of modern labour practices. As investors, this is what we are trying to address,’ he said. Change can be brought about. He pointed out that companies such as Nike had issues many years ago and learned from their mistakes, but in Boohoo’s case, the company’s initial denials and failures to apologise have not inspired confidence. For Ashley Hamilton Claxton, head of responsible investment at Royal London Asset Management, the onus is on fund managers. Agencies provide an opinion not an objective data point. ‘You have to accept that research cannot be outsourced to a third party; it’s essential that fund managers have an in-house team with the ability to do their own due diligence,’ she said. Even though ESG data quality is improving, with more and more data providers entering the market and artificial intelligence models increasingly being used to analyse trends and add real time insights into their methodologies, the datasets are overall still relatively backward-looking, she said. ‘This is where in-depth knowledge and experience become vital: ESG has to be more than an exercise in box-ticking.’
ESG FUNDS SURVIVE THE COVID-19 CRASH TEST INTACT
chapter Two
The first half of 2020 served as one of the biggest crash-tests for ESG investment strategies to date. The burgeoning sector was put through its paces in March, as the repercussions of the global pandemic began to be felt and economies went into lockdown. This caused markets to go into freefall, as fear and uncertainty took hold. Between 20 February and 23 March, the S&P 500 index plunged 34% to 2,237 points, while closer to home the FTSE 100 fell 33% to 4,994 points. Fortunately, things started to look brighter from late March onwards when it became clear that governments and central banks around the globe would step in with unprecedented packages to help economies to recover. Despite the significant market drawdowns, funds that employ ESG criteria to select stocks broadly fared well year-to-date, dispelling the myth that investing responsibly means foregoing returns. Research by Bank of America Merrill Lynch (BofAML) showed the top 20% of ESG-ranked stocks outperformed the US market by more than 5% during the March sell-off. What’s more, this trend continued into the second quarter – although the outperformance was less marked, as investors rotated into more economically sensitive cyclical stocks. BofAML noted that ESG indices in Europe outperformed their benchmarks between 1 January and 25 March, with the top 50 most overweighted stocks in ESG funds outperforming the most underweighted by more than 10%. Sector biases are likely to have contributed, as ESG funds tend to avoid troubled energy stocks and are typically overweight sectors like consumer staples, technology and healthcare – which have held up fairly well this year. MOVING INTO THE MAINSTREAM Nevertheless, Citywire AA-rated Schroder ISF Global Sustainable Growth manager Katherine Davidson believes there is more to it. She pointed out that ESG leaders in the US had experienced smaller earnings per share cuts in comparison to their non-ESG peers. ‘This continues to support our view that companies which are the most sustainable will outperform their less sustainable peers over the long term,’ she explained. Davidson believes the Covid-19 crisis has increased the visibility and perceived importance of sustainable business practices. ‘Amid terrifying headlines and unprecedented disruption to our day-to-day lives, we are all rethinking our personal values and priorities,’ she noted. Louie French, a senior research analyst at Tilney, agrees. In his opinion, themes associated with ESG and sustainability have moved into the mainstream for businesses and consumers alike. ‘This presents an attractive investment opportunity as the global economy becomes more focused on sustainability, which should continue to provide a positive tailwind for companies that score well on ESG and are aiding a greener economic recovery,’ he said. He has been pleased with the performance of a range of ESG funds held in Tilney’s sustainable portfolios. They include Brown Advisory US Sustainable Growth, BMO Responsible Global Equity, Impax Environmental Markets and Liontrust Sustainable Future European Growth. When it comes to themes, he said resource efficiency; health and wellbeing; climate change and efforts to reduce plastic pollution had all boosted performance in recent years. Andrew Wilson, chief investment officer at Lockhart Capital Management, also pointed to BMO Responsible Global Equity as a strong performer, alongside M&G Positive Impact and Stewart Investors Global Emerging Markets Sustainability. ‘We have a separate ESG portfolio that we manage for clients, and that makes up about 20% of our assets under management. Within our other strategies, most “ordinary” fund managers have some sort of ESG element within their process these days, either explicitly or implicitly. ‘For example, few managers want to invest in businesses with terrible corporate governance, where minority investors are mistreated. So it has always been there to some extent,’ he explained. The growing visibility and popularity of sustainable business practices helps to explain why flows into ESG funds have remained strong in spite of market volatility. During the second quarter, global inflows into ESG open-ended funds and exchange-traded funds rose by 72%, according to Morningstar. This equated to $71.1bn (£53.1bn) in net flows, with Europe accounting for the lion’s share (some 86.3%) of the allocations. At the end of June, assets in sustainable funds hit a record high of $1.06tn, up 23% from the previous quarter. SURVIVING THE SELL-OFF Many investors point to the obvious benefits associated with holding companies that score well on ESG criteria. They include lower operational and reputational risk, better relations with employees, as well as robust supply chains. Camilla Ritchie, a senior investment manager at Seven Investment Management (7IM), said the quality bias that is typically evident in ESG funds explains why they have held up well this year. ‘In the last six months of the Covid-19 crisis, it’s the quality companies that have done well, such as those with strong balance sheets and strong growth in revenues and profits. These tend to score highly in ESG terms, thereby helping ESG screened funds outperform those that do not have such a screen in place.’ This outperformance has been impressive in some cases. We examined the top-performing funds in the Investment Association’s global equity sector that have been awarded either four or five Morningstar sustainability ratings, also known as a globe rating. This rating evaluates how well companies held in portfolios are managing their ESG impact compared to their peers, with five globes marking the top ranking. The average fund in the global equity sector with an above average or high sustainability rating has returned 7.3% in sterling terms since the beginning of the year to 14 August. This compares to 3.7% apiece by the sector average and the MSCI World index. It is interesting to note that 58 funds in the sector, which had either four or five Morningstar sustainability globes, exceeded this 7.3% return. They include Guinness Sustainable Energy, managed by Will Riley and Jonathan Waghorn, which led the way with an impressive 31.1% over the period. Goldman Sachs Global Millennials Equity, which targets companies benefiting from the behaviour of millennials, claimed second place with a 28.4% return over the period. The strategy is managed by Alexis Deladerrière, who is Citywire A-rated, Nathan Lin and Laura Destribats. Meanwhile, MS INVF Emerging Leaders Equity, managed by A-rated Vishal Gupta, claimed third spot with a 22.4% gain. The data shows that ESG investing isn’t simply a ‘bull market luxury’, if anything, it is likely to become even more attractive for investors during a downturn.
wORDS By Danielle Levy
‘Amid terrifying headlines and unprecedented disruption to our day-to-day lives, we are all rethinking our personal values and priorities’
Katherine Davidson, sustainable growth manager, Schroders
‘We accept that to some extent ESG is in the eye of the beholder, and what to one manager is a below average ESG score, to another is an opportunity to engage with the business’
All signs point to a strong showing in the face of adversity for ESG funds in 2020, but will it last?
WHAT LIES AHEAD? As we look ahead to the fourth quarter of 2020, can ESG stocks continue to deliver? Lockhart’s Wilson said it is difficult to make this call. Nevertheless, he pointed to the tailwind of positive inflows from investors, which to an extent could act as a ‘self-fulfilling prophecy’. ‘However, if the oil and tobacco sectors outperform over the next year, then most ESG funds are not going to be winners, as they will be largely absent from those areas. So one needs to bear in mind the structural sector and style biases that are virtually inevitable in any ESG fund,’ he added. While some investors suspect value stocks could mean revert soon, after more than a decade of strong performance for growth stocks, 7IM’s Ritchie disagreed. ‘ESG is becoming more important for companies and fund managers alike, and I think this will continue to drive selection of quality companies, such as those that score highly in ESG terms, while value factors will continue to lag,’ she explained. Rob Morgan, pensions and investments analyst at Charles Stanley Direct, was keen to take a step back and look at the bigger picture. In his opinion, two industrial revolutions are taking place simultaneously: while one is digital in nature, the other relates to the growth of green practices. Businesses that are aligned to these two trends will be well-placed to succeed, he predicts. However, he was keen to stress that ESG is only ‘one part of the jigsaw’, so investors should think about other factors when analysing a company’s prospects. THE 'ESG-PREMIUM' While ESG stocks have their attractions, some investors are concerned about the premium that appears to be attached to these businesses. ‘There is seemingly an “ESG premium” being paid, but this is often very difficult to disentangle from a general “quality” premium and various other factors, such as momentum,’ Morgan explained. ‘However, there isn’t a particular reason to believe this will moderate where it exists, so while we are conscious of it, and would take it into account, it’s not a significant concern. In general, stocks that score well do deserve to be on a premium, and while there are pockets of overvaluation we don’t think it is widespread,’ he added. Wilson described the ‘ESG premium’ as a growing concern. This is because stocks that consistently achieve positive ESG scores are likely to continue to attract significant flows, and in some cases these could be price insensitive. ‘It is not clear when this will become a systemic issue, if at all, as at the moment it is just a pleasant tailwind, so active managers are yet to have huge issues. ‘It may have some parallels with the passive/ETF phenomenon, which has skewed markets increasingly to growth and momentum, and pushed up stock prices by market cap. This has been going on for 25 years, so it is not necessarily something you have wanted to be short of, even if it may ultimately end in tears,’ he explained. The chief investment officer suspects a problem will emerge if or when the ESG industry experiences net outflows. However, he believes this is still some way off. AVOIDING THE NEXT BOOHOO Tilney’s French agreed that some parts of the market currently look expensive, particularly parts of the renewable energy, technology and water sectors. However, he is more concerned about potential valuations and returns in this space if independent ESG scores fail to identify the underlying ESG risks of a company. ‘ESG scoring methodologies are far from a perfect science and the recent issues involving Boohoo and their supply chain should be a wake-up call for investors, especially those that rely exclusively on ESG scores within their investment selection. At Tilney, ESG scoring is only one input into our wider investment process and research,’ he explained. Wilson echoes these sentiments. He said investors must pay close attention to whether ESG funds are living up to the letter or spirit of their processes and parameters. ‘We do accept that to some extent ESG is in the eye of the beholder, and what to one manager is a below average ESG score, to another is an opportunity to engage with the business, improve its ESG scores and make a genuine difference. Fund managers do need to grow the NAV for unit holders too. ‘Nevertheless, occasionally there are industries and companies where our observation would be that they don’t look ideally suited to an ESG or ethical fund, and so we will challenge managers under such circumstances,’ he said.
‘In the last six months of the Covid-19 crisis, it’s the quality companies that have done well, such as those with strong balance sheets and strong growth in revenues and profits. These tend to score highly in ESG terms’
Camilla Ritchie, senior investment manager, 7IM
Andrew Wilson, chief investment officer, Lockhart Capital Management
THE 'S' AND 'G' OF ESG
chapter Three
In recent years, teenage activist Greta Thunberg, Extinction Rebellion protesters and the divestment movement have amplified ever-urgent warnings over climate change from the scientific community. But in 2020 social and governance factors have finally stolen the limelight from environmental ones. ‘The 2020s were supposed to be the decade to save the planet, but fast forward eight months and the world is a very different place,’ said Gemma Woodward, director of responsible investment at Quilter Cheviot. While the ‘E’ of ESG investing is the simplest of the three pillars for companies to identify, quantify and act upon – airlines, for example, have planted forests to balance their environmental books – the ‘S’ and ‘G’ have until now been brushed aside as intangible and difficult to measure. The #MeToo and #PayMeToo campaigns against sexual harassment and the gender pay gap respectively have gone some way to promote social change, but 2020 has upped the ante with the coronavirus pandemic and #BlackLivesMatter movement embedding social imbalances and corporate governance practices into the public consciousness. ‘With the rise of social media so many people now have a voice to speak out in favour of change,’ said James Penny, chief investment officer at TAM Asset Management. ‘Social and governance issues are just as close to people’s hearts as environmental ones, so it makes sense that we’re in an age of S and G catching up with E.’ Until recently, employees and communities ranked second to shareholders, but companies are now much more switched on to employee wellbeing and how their business impacts communities. ‘Public opinion is now dominated by the role and contribution of companies within society, and social and governance considerations have been vastly more important than environmental considerations in providing the public and investors with a lens to scrutinise company behaviour,’ said Woodward. ‘Instead of “daddy, what did you do during the war?”, it’s a case of “senior management, what did you do during Covid?”. The gap between the businesses responding positively and those appearing to exploit their employees or government support has been cavernous and will not be forgotten by consumers in a hurry.’ AN ENGAGED PUBLIC Companies have increased their ties with society beyond selling products to customers in numerous ways. Some have redirected their manufacturing capabilities to produce personal protective equipment, ventilators and hand sanitiser. Gig-economy companies have extended sick-leave benefits to self-employed workers, while larger firms have improved payment terms for smaller suppliers, particularly in the food supply chain. On the flip side, negative headlines have outed poor labour practices and corporate greed. Shares in online fashion retailer Boohoo plummeted after one of its UK suppliers was found to be putting workers at risk of Covid-19 and paying below the minimum wage. Kodak executives in the US are being investigated over potential wrongdoing relating to them buying shares and awarding stock options a day before news of a US federal government loan was made public, sending its share price soaring. The global health crisis has given renewed focus to the issue of executive pay as company executives strive to be ‘in it together’ with their employees. An analysis by CIPD, the professional body for HR, and the High Pay Centre think tank, shows that 36 FTSE 100 firms have cut executive pay during the pandemic, with the most common measure being to reduce salaries at the top by 20%. It has also led to mass deliberation about social inequality, employee healthcare and remote management of employees’ wellbeing. ‘After all, what is a company without its employees and what is an economy without its labouring taxpayers?’ asked Kingswood Group investment manager Harry Merrison. Meanwhile, the death of George Floyd in the US created a powerful public backlash against police brutality and racial injustice, largely played out on social media. Companies spoke out and many issued statements of support and promised meaningful changes to how they handle racial diversity. ‘An engaged public with pensions entrusted to asset owners is forcing corporates to re-evaluate how they foster a diverse workplace going beyond token management and board appointments,’ said Jennifer Anderson, co-head of sustainable investing and ESG at Lazard Asset Management, which considers diversity a key factor when evaluating securities. ‘A workforce comprised of people with varied backgrounds and experiences creates a cognitive diversity that empowers firms to challenge conventional wisdom and leads to better decisions.’ RESILIENCE AMID UNCERTAINTY Stakeholder management in times of crisis provides ‘real-time opportunities to expose corporate weak spots and test strengths’, according to David Storm, head of multi-asset portfolio strategy at RBC Wealth Management. He views strong ‘S’ and ‘G’ records as key to corporate resiliency, the subject of several recent reports, including BlackRock’s ‘Sustainable investing: resilience amid uncertainty’ and a working paper jointly published by State Street Associates and Harvard Business School. Further studies emphasise that environmental, social and governance factors inform one another in the broader resiliency mosaic. ‘For example, in applying for third-party ESG ratings companies typically audit and report on their supply chains, employee policies and internal controls,’ said Storm. ‘While supply chain audits may start as an environmental assessment, this due diligence often sheds light on operational and reputational risks that might otherwise be overlooked.’ There is an ample body of evidence to support the notion that companies that score highly across E, S and G factors have better long-term viability and are more likely to deliver better long-term returns. ‘E, S and G factors can and do translate into financial risks and opportunities,’ said Cléo Fitzsimons, sustainable investment lead at Cazenove Capital. ‘Any manager who isn’t taking them into consideration is ignoring a hugely valuable and important dataset and their performance is likely to suffer in the long term.’ Cazenove’s investment analysis focuses on a company’s relationship with six main stakeholders: customers, employees, suppliers, community, regulators and environment. The first four are considered social factors and the fifth a governance factor. HIGHLY PERSONAL Fitzsimons pointed to increased interest among clients to invest in a way that supports the United Nations’ 17 Sustainable Development Goals (SDGs) in companies like Raia Drogasil, a Brazilian pharmacy chain that provides access to affordable care in many of Latin America’s poorest and ageing countries. It has made a significant social impact during the Covid-19 pandemic, enabling customers to order medicine and receive pharmacist consultations online. As an employer, it offers training, benefits and wellness schemes to staff. More than 1,000 of its workers have a disability and 64% are female. Raia directly supports four SDGs – numbers three (good health and wellbeing), five (gender equality), eight (decent work and economic growth) and 10 (reducing inequality). It stands to reason that the issues that matter most to investors vary by jurisdiction, according to Mitch Reznick, London-based head of sustainable fixed income at Federated Hermes. In emerging markets, the focus is on safe working conditions, fair pay and employee welfare. In highly regulated, developed markets it is on things such as treating customers fairly, bridging the digital divide and the suspension of penalties for late mortgage payments in periods of financial stress, Reznick said. Of course from a client perspective, sustainable investing is highly personal and subjective. ‘Over the last year we have seen an increase in clients asking questions about specific areas to ensure their investments are aligned with their personal views,’ said Emma Foden-Pattinson, an investment manager at Charles Stanley. ‘Some people are specifically interested in social impact while others focus more on human rights and the supply chain.’ THEMES OF INTEREST Diversity of corporate boards is probably the most researched area and comes up regularly in client discussions at RBC. ‘We also look at jobs created, gender equality, tax gaps and the avoidance of social harm,’ said Storm. Lazard points to increased interest in how firms assess the requirements of the Modern Slavery Act. ‘Interestingly, a stronger focus on sustainable investment means that companies that fail to manage human capital, in particular labour practices in the supply chain, are starting to see an impact on their financial performance,’ said Anderson. Education, which aligns with the fourth SDG of ‘quality education’, is a theme of interest to Canaccord Genuity Wealth Management’s clients. Patrick Thomas, its head of ESG investing, said: ‘Education is a global issue. It’s key to achieving many other objectives, such as breaking away from the cycle of poverty, reducing inequality and creating healthier lifestyles. And since it’s a sector that’s being hugely disrupted at the moment, there are lots of opportunities for investors.’ Canaccord Genuity uses the CPR Invest Education and Baillie Gifford Positive Change funds to access the theme. It uses Liontrust UK Ethical to access companies bringing positive change to the corporate world and treating employees fairly through sound diversity policies and good employee benefits programmes. Within healthcare it invests in developments in oncology through the Candriam Equities L Oncology Impact fund, while cybersecurity and the protection it affords society is accessed through L&G Cyber Security ETF, iShares Cybersecurity and Tech ETF and Pictet Security. NICHE PRODUCTS Lazard has launched several new sustainable and thematic strategies in 2020, including niche plays such as the Lazard Minerva Gender Diversity fund, which focuses on female representation in organisations. That, it seems, is a trend that is set to continue. ‘It could be argued that investors will shrug off ESG considerations just as they did after the global financial crisis over a decade ago, but we believe the next few years will bring increased emphasis on social accountability and best governance practices,’ said Shannon Lancaster, a fund analyst at Ravenscroft. ‘The ESG space will evolve to offer more niche products that tackle inequality, racial injustice, access to education and healthcare and further environmental solutions, as well as other pressing ESG issues.’
wORDS By Jennifer Hill
‘Instead of “daddy, what did you do during the war?”, it’s a case of “senior management, what did you do during Covid?”. The gap between those businesses responding positively and those appearing to exploit their employees or government support has been cavernous and will not be forgotten by consumers in a hurry’
‘An engaged public with pensions entrusted to asset owners is forcing corporates to re-evaluate how they foster a diverse workplace going beyond token management and board appointments’
Environmental considerations have long been the focus for sustainable investors, but 2020 pushed social and governance factors centre stage
Gemma Woodward, director of responsible investment, Quilter Cheviot
‘The ESG space will evolve to offer more niche products that tackle inequality, racial injustice, access to education and healthcare, and further environmental solutions as well as other pressing ESG issues’
Shannon Lancaster, fund analyst, Ravenscroft
Jennifer Anderson, co-head of sustainable investing and ESG, Lazard Asset Management
BACK
TIME TO GET SOCIAL: GREEN BONDS FACE TOUGH COMPETITION
chapter FOUR
Social bonds are on a roll. Following a record-breaking 2019, social bond supply soared to new heights in the first seven months of 2020. Dutch bank ING estimates that it had reached €45bn by the beginning of August, triple the whole of 2019’s €15bn. As the star of social bonds rises, the enthusiasm for their more established green counterparts fizzles. According to Morgan Stanley, April saw social and sustainability bond offerings increase to $32bn, outpacing green bonds for the first time. As it stands, the pandemic turned out to be a catalyst for social bonds, with Covid-19 one of the main drivers behind the realignment in the ESG space. In the face of spikes in unemployment rates and healthcare systems in overdrive, social bonds have the potential to become the fastest-growing segment of the sustainable debt market in 2020, according to an S&P Global Ratings report. The rapid rise in social bonds stands in stark contrast to the rest of the global fixed income market, where S&P expects issuance volume to drop by 9% this year. ‘Undoubtedly, much of this rapid growth can be attributed to the effect of the Covid-19 pandemic, which has accelerated issuance of social bonds to finance both public and private responses and create positive social outcomes, especially for target populations,’ the report says. Even so, Nadège Tillier, head of corporate credit research at ING, is sceptical of the social bond boom. While she acknowledged that social bonds have eked out an advantage over their green brethren in the wake of Covid-19, Tillier also thinks that it is only a fad: ‘Green bonds still represent the bigger asset class and I don’t think that is going to change in the foreseeable future. I don’t see a major shift in the ESG investment landscape from the environmental to the social component in the long term.’ Christopher Wigley, a specialist ESG fixed income portfolio manager, begged to differ. ‘I think the strong social bond supply we’re seeing at the moment will continue. Certainly, green bonds have been a success story since 2007 and maybe social and sustainability bonds have been poor cousins during that time. However, the potential for social and sustainability bonds is very large, given the range of projects they can finance. ‘I do see the rise in social bonds continuing, not least due to certain entities that have said they would issue Covid-19 social bonds in the future. The European Stability Mechanism is one of them. It has also been speculated that we may see more banks issue Covid-19 social bonds, so we can expect more to come,’ he said. Farnam Bidgoli, EMEA head of sustainable bonds at HSBC, sings a similar tune: ‘I definitely think that there will be a sustained element to the rise in social bonds. The initial catalyst was undoubtedly the pandemic, but a lot of the things that have come out of the issuance boom this year will have a long-lasting effect. This will result in a sustained growth in the market.’ ENTER PANDEMIC BONDS The emergence of pandemic bonds, which look to finance Covid-19 relief efforts, has certainly fuelled the social bond market’s stellar rise. But while they attracted an eye-watering €237bn in the first half of the year, only about 15% of pandemic bonds qualified as social or sustainable bonds, a report by ING found. Even so, social and sustainability bonds could outstrip their green peers this year. ‘Narrowing it down to social and sustainability bonds only, chances are high that related issuance will at least be on par with green bond issuance this year, especially as all stars are aligned to show we are not over the pandemic, nor are we over the indirect social impacts that could emerge,’ said Marie Fromaget, ESG analyst at AXA Investment Managers. ‘Of course, the differentiation between social and pandemic bonds depends on how you look at them,’ ING’s Tillier said. ‘To me, they are two different things. Pandemic bonds aim to help societies combat the impact of Covid-19, but they are not necessarily sustainable or social. These bonds don’t have to adhere to a framework that is in line with the required standards.’ According to Tillier, pandemic bond offerings followed the spread of Covid-19 around the world. They kicked off in Asia before moving on to Europe and finally sweeping across North and South America. Unlike their social and green counterparts, however, pandemic bonds proved to be more popular with national governments. ‘The vast majority of issuing entities behind green and social bonds are agencies and supranational organisations. In the case of green bonds, agencies issued about 20% of them between January and the beginning of August 2020. Utilities and industrials were responsible for 20% and 15%, respectively, while financial institutions sold about 25% of green bonds,’ Tillier said. ‘Social bonds are different in that agencies accounted for about 50% of issuance in the same period, with the French employment agency Unédic, the Investment Bank of Korea and Korea SMEs and Startups Agency among the most active issuers. Sovereigns and supranationals like the African Development Bank made up about 20% of social bond suppliers,’ she added. Bidgoli expects this trend to continue. ‘I think we’ll definitely see more social bond offerings from banks and financial institutions. We’re working with a couple of issuers, who will come to market later this year, and are currently in the process of going through existing loan books and trying to identify what may have a social impact.’
‘I definitely think that there will be a sustained element to the rise in social bonds. The initial catalyst was undoubtedly the pandemic, but a lot of the things that have come out of the issuance boom this year will have a long-lasting effect. This will result in a sustained growth in the market’
Farnam Bidgoli, EMEA head of sustainable bonds, HSBC
The runaway popularity of social bond issuance amid the pandemic in 2020: a green bond challenger or a flash in the pan?
‘Green bonds have one main purpose: drive the energy transition. From my point of view, a green bond issued by an oil and gas business is clearly a good one, because the proceeds are going into something other than oil and gas. It all comes down to one question: Do you want to buy green bonds from firms that are already upholding environmental standards or do you want to turn grey companies into green?’
Nadège Tillier, head of corporate credit research, ING
THE CASE FOR GREEN AND SOCIAL GIFTS The heavy focus of both green and social bond offerings on the financial and public sector is a thorn in the flesh of Columbia Threadneedle’s Simon Bond. In a note from July, the director of responsible investment and portfolio management makes the case for green gilts, which, he argues, can become a valuable tool in the fight against climate change and other environmental issues Bond urges countries to take a cue from the ‘success of the green bond market’ and laments the fact that ‘only a few governments have recognised the benefits of green bonds’. So far, only Poland, France, Belgium, Ireland and the Netherlands have issued sovereign green bonds, with Germany and Sweden planning to come to the market. Will the UK be next to follow? ‘I think there are a number of reasons why the UK should issue a green gilt,’ ESG expert Wigley said. ‘It’s not necessarily to do with pricing as the yield on green bonds should not be higher or lower than that of conventional bonds from the same issuer. I believe the advantages lie in the diversification of the issuer’s investor base and the possibility to meet national sustainability targets.’ This raises the question of whether the next logical step is the emergence of social gilts. From Wigley’s point of view, they are still a way off: ‘The problem of issuing a social bond is that there’s no real social bond index, so there’s less incentive for investors to follow, even though a lot of them would like to invest in a social gilt. ‘It’s a different picture for green bonds. There are several established green bond indices that serve as a benchmark for some funds. If the UK were to issue a green gilt, for example in the region of £10bn to £30bn, that would make it the second largest in the index. As a result, certain investors might feel they could not afford to not have it in their fund. In other words, there’s an added attraction for issuing a green gilt.’ HSBC’s Bidgoli sees it similarly: ‘Reporting has always been the Achilles’ heel of the social bond market. The lack of clearly defined metrics is a barrier for social bonds. Issuers are wondering “how do I report on my portfolio of loans that have a social impact? How will it be received by the market?”. I think once you have more examples to point to, more issuers will feel confident enough to come into the market. It has a snowball effect.’ PITFALLS OF OVERSIMPLIFICATION Before expanding the boundaries of ESG bonds in general, however, the asset management industry has to overcome fundamental obstacles. As ING’s Tillier pointed out, the integration of ESG criteria into the credit space is complicated by the unification of investment policies across different asset classes. In her opinion, the incompatibility of different approaches significantly reduces the investible universe. ‘A lot of asset managers tend to apply the same rules to all types of investments. That can lead to problems, for example, if you are suddenly not able to invest in a name in credit any more because the equity team has decided to put it on a red list. That’s why I think asset managers should have an ESG policy for each asset class,’ she said. Investors’ unwillingness to allocate money to companies that have only just embarked on their ESG journey and have yet to live up to ESG standards represents another shortcoming in her eyes: ‘I have been surprised to see that quite a few investors would refuse to invest in a green bond just because the issuer is not green. Take Exxon’s green bond as an example. You have investors who say “I’m not going to invest in this because Exxon is an oil and gas company”. Thankfully, there are others that will happily invest in these bonds, because they see what good it can do in the future. ‘Green bonds have one main purpose: Drive the energy transition,’ Tillier continued. ‘From my point of view, a green bond issued by an oil and gas business is clearly a good one, because the proceeds are going into something other than oil and gas. It all comes down to one question: do you want to buy green bonds from firms that are already upholding environmental standards or do you want to turn grey into green companies?’ As green and social bonds gain popularity, greenwashing and social washing have also come into focus. What is the investment industry doing to keep them at bay? ‘There are several measures in place to try and reduce that risk,’ Wigley says. ‘For example, underwriting banks are careful about what sort of issuance and structures they bring to the market. Similarly, there’s also often a second-party opinion provider involved, which helps to weed out the possible risk of greenwashing. ‘Regular reporting that usually comes in after 12 months is also an opportunity for investors to take a close look at the projects that have been funded and their estimated impact. I think the market is quite vigilant with regard to green and social washing. It has to be.’
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ESG INVESTING: THE ONLY WAY IS ACTIVE
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The increased interest in ESG (Environmental, Social and Governance) investing has continued to come into prominence during the coronavirus pandemic. This momentum has built on what was already a fast growing sector of the market. The number of ESG funds available has mushroomed to nearly 3500 globally, representing a 50% increase over the past 3 years. Whilst actively managed ESG funds attract the majority of inflows, the sharp increase in sustainability index funds was highlighted in a recent report by Morningstar, which revealed that there are over 500 ESG mutual and exchange traded funds globally, with $250bn under management. ESG INVESTORS NEED TO STAY ACTIVE The debate in mainstream investing over active vs passive has been driven very much by fees and a race to the bottom. Whilst ESG funds are not immune to the trend towards “more for less”, there are two main factors as to why active management in ESG will continue to thrive. Firstly, only active managers can engage on ESG the issues that are important for their clients and secondly, active managers play a key role in exercising proxy voting ensuring that the interests of shareholders are represented. Both engagement and voting are platforms from which investors can influence how businesses impact the environment and communities in which they operate. Whilst passive solutions have a role to play in markets, they are derived from instruments that are unlikely to allow ESG investors to fully align their values with investment returns, as they don’t engage with companies or vote proxies. In addition, passive strategies can often exclude smaller companies where innovating products and services first emerge, before being adopted by larger peers. The pressure on management fees has been a catalyst for the surge in passive investing which now includes ESG strategies. However, we would urge caution on passive products which are built off indices that may include companies that are at odds with the values of many ESG investors. .
words by Patricia Holburn
Click to read more about: Why “corporate karma” is crucial for your investment returns
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IINDICES: "CAVEAT EMPTOR"" Investors should adopt a “buyer beware” approach when investing in passive strategies build on indices. The surge in technology shares which now account for over 20% of the US market is a good example of how concentration risk can build up quickly, even in the broadest of indices. The largest companies by weight in the S&P 500 are Apple, Microsoft, Amazon, Alphabet and Facebook. Similarly in the UK, the FTSE 100 index which was once dominated by Oil & Gas, Mining and Banks now has 2 pharmaceutical companies (AstraZeneca and GlaxoSmithKline) as it largest constituents, with a combined market weight of 12%. The manner in which indices are constructed also has a material impact, whether that be market, price or equal weighted approaches. For example, the S&P 500, a market weighted index, used to be seen as a broad gauge of the US economy, but now is dominated by a handful of technology companies which offer a very narrow window on the wider economy. Investors of all hues should be aware of the underlying sector exposures and associated concentration risks when using passive solutions. For ESG investors, often avoiding companies whose operations and practices are unacceptable is as important as investing in those businesses that are at the vanguard of bringing sustainable outcomes in the environment and communities in which they operate. The rise of the “S” in ESG The pandemic has led increased interest in the “Social” in ESG with more focus on social justice and inequality. Whilst the “E” has always garnered most of the headlines, investors are now challenging companies to show leadership on the social front encompassing diversity, supply chain operations and labour relations. Active ESG managers are well placed to use the “G” via proxy votes to engage and influence company management on delivering on social metrics, which are increasingly being incorporated in how management are measured and ultimately rewarded.
Ketan Patel Fund Manager of the EdenTree Amity UK Fund
Click to read more about: Managing corporate controversies: the role of ESG ratings
Source: Schroders, December 2017
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ESG INVESTING: DELIVERING LONG-TERM PERFORMANCE The long-term tailwinds gathering strength augur well for ESG active investing with a greater focus on the role that companies will play in mitigating climate change and delivering social justice. Investors of all persuasions will be holding company management to greater account than ever before through engagement and proxy voting. The outperformance of ESG active funds is a key catalyst in bringing about a long overdue change, busting the myth that ESG investing is only for the minority who can afford to give up financial returns, whilst holding true to their values. For example, 1 in 5 funds which are top quartile over 1 and 3 years in the UK All Companies category are ESG strategies. The long term outperformance in ESG active funds means that investors can now enjoy superior returns whilst investing in companies that are making a positive contribution to both society and the environment.
Risk-Adjusted Citywire Manager Ratio
The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. If you are unsure which investment is most suited for you, the advice of a qualified financial adviser should be sought. EdenTree Investment Management Limited (EdenTree) Reg. No. 2519319. Registered in England at Beaufort House, Brunswick Road, Gloucester, GL1 1JZ, United Kingdom. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.
Ketan Patel Track Record in Equity UK All Companies
SOURCE: Citywire Discovery/Morningstar, as at 31.08.2020. Performance is based on total return in GBP calculated gross of tax, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. Average manager is the based upon the managers tracked globally in Citywire’s Equity - UK (All Companies) sector.
Comment: Ketan Patel has outperformed the FTSE All Share TR and average manager over the past three months, six months, one year, three year and four year time frames. This outperformance has been achieved while limiting losses to less than the market during the stock market crash between February and March this year. The Amity UK fund has overweights to healthcare (20%) and industrial (29%) names. The latter is significant given how economically sensitive these companies typically are, which makes the portfolio’s outperformance during the pandemic that much more impressive. This position leaves the fund well placed to capture any re-rating that these companies may experience in the event of an uptick in global growth.
Ketan Patel’s Maximum Drawdown - 3 Years
SOURCE: Citywire Discovery/Morningstar, as at 31.08.2020. Performance is based on total return in GBP calculated gross of tax, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. Average manager is the based upon the managers tracked globally in Citywire’s Equity - UK (All Companies) sector. *Citywire’s risk adjusted returns are calculated using a derivative of the information ratio - the manager ratio (MR). This takes into account every fund a manager has run in a peer group over a certain time frame.
Whilst passive solutions have a role to play in markets, they are derived from instruments that are unlikely to allow ESG investors to fully align their values with investment returns
For ESG investors, avoiding companies whose operations & practices are unacceptable is as important as investing in sustainable businesses
HOW COVID-19 HAS RESET THE FOCUS ON IMPACT INVESTING
WHAT IS IMPACT INVESTING AND HOW DOES IT DIFFER FROM ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)? A sustainable company is one that takes into account all of the material ESG factors and seeks to do no harm. Impact investing goes beyond ESG and sustainability integration, meaning that risk mitigation and avoiding harm are already a part of it. We see impact investing as the final step in responsible investing because it gives investors the ability to quantify how they are contributing to resolving critical needs, in alignment with the UN Sustainable Development Goals (SDGs), which are the UN’s blueprint to achieve a better and more sustainable future for all, by 2030. WHY SHOULD INVESTORS CONSIDER IMPACT FUNDS? Firstly, impact investing is about creating value for all stakeholders, not just the minorities. Secondly, through the SDGs, investors can address, map and monitor the most critical needs the world is facing, that need to be resolved. Thirdly, impact investing gives investors exposure to leading companies, whose positive impacts are aligned with the growth drivers of tomorrow. WHAT HAS CONTRIBUTED TO THE RECENT INCREASE IN DEMAND FOR IMPACT INVESTING? Whereas before investors were using ESG and sustainability as risk mitigation tools to avoid companies that were perceived as destroying value, COVID-19 has caused a paradigm shift in consciousness among governments, companies and society as a whole. It has identified many pressing issues such as the need to create more resilience in healthcare systems and supply chains. It has put climate change, worker rights and the gig (short-term employment) economy under the spotlight. In turn, this has resulted in a significant boost in demand for impact investing in public markets. Until around five years ago, impact investing was still seen as the domain of private markets and non-government organisations. The importance of the SDGs is more evident than ever, as they give a clear roadmap to investors of where the work needs to be done, and how to monitor progress. The SDGs also help investors understand where the world needs to be by 2030, rather than the original premise of where it would like to be. HOW DO YOU IDENTIFY IMPACT OPPORTUNITIES? For us, the key pillar of idea generation is a combination of thematic and impact investing, which seeks to identify opportunities created by megatrends. We have identified nine key impact themes, in alignment with the SDGs, that focus on the world’s most pressing needs, such as food security, health and well-being and financial inclusion, just to mention a few. Within those nine themes, we look for investment opportunities that are innovative, and help tackle social imbalances. HOW WOULD YOU DESCRIBE YOUR INVESTMENT STYLE? We are patient capital investors. I’ve been running high-conviction portfolios that are style and benchmark agnostic my entire career, so what I look for is what I deem to be the best companies. We are active investors which means sticking by our best ideas rather than actively trading to satisfy short-term performance targets. WHAT MAKES FEDERATED HERMES FUNDS STAND OUT FROM THE CROWD? There’s a long list! We are pioneers in this space, not only in impact but in the whole responsible investing space. We have a track record that dates back more than 30 years and have participated in many key initiatives. We were one of the founding signatories of the UN Principles of Responsible Investment (PRI) and our CEO was recently awarded a CBE for services to Responsible Business and Finance. We have been integrating ESG now for a long time across our product range and we see ourselves as a partner to investors in sustainable investing, given this is part of the company’s DNA.
DOES THE FUND HAVE A SPECIFIC WAY OF MEASURING IMPACT AND THE POSITIVE BENEFITS OF MEGATRENDS? Yes, we pride ourselves on our rigorous impact assessment and for us an impact label without accountability has no purpose. We have developed a proprietary database which quantifies the impact of each holding in the portfolio. We want to show our investors how their funds have contributed to making the world a better place. So we will only invest in stocks with a clear and measurable positive impact on the environment or society. Health and wellbeing is a big theme in the portfolio. I have been investing in what I call persistent global health pandemics for a long time, such as non-communicable diseases. Almost 70% of global deaths annually can be attributed to non-communicable diseases, of which diabetes has the highest incidence globally. Today, 500m adults worldwide are estimated to have diabetes and the economic burden of this disease is immense. Not only the direct cost of diabetes, but the indirect costs too, such as the inability to work. These diseases come at such a high cost both to society and to already strained healthcare budgets. We have invested in a number of companies operating in this space, including medical devices and pharmaceutical companies. For example, through the production of continuous glucose monitoring products, one of our holdings can help deliver positive impact by reducing the cost burden to the health system and simplifying disease management, which in turn improves a patient’s quality of life. And this is really what matters to us, contributing to a resolution of critical needs, through investment. HOW HAS THE FUND PERFORMED SINCE LAUNCH? Since launch, the fund has delivered an annualised return, net of fees, of 13.7%, outperforming the MSCI All Country World IMI index by 7.2%.1 WHAT HAVE THE IMPACTS OF COVID-19 BEEN ON THE FUND? This has been one of the most challenging times for financial markets and society, however the fund has remained resilient. We were pleased to see that during the Q2 reporting season, around 70% of our portfolio companies either reported earnings ahead of expectations or were closely in line. We invest in companies which provide innovative solutions to meet unmet needs. And as such, they are exposed to enduring sources of demand.
Ingrid Kukuljan, Head of Impact Investing, at the international business of Federated Hermes
Issued and approved by Hermes Fund Managers Ireland Limited (“HFMIL”) which is authorised and regulated by the Central Bank of Ireland. Registered address: The Wilde, 53 Merrion Square, Dublin 2, Ireland. HFMIL appoints Hermes Investment Management Limited (“HIML”) to undertake distribution activities in respect of the Fund in certain jurisdictions. HIML is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET.
As the global pandemic turns the world on its head, impact investing comes of age
Federated Hermes Impact Opportunities since Launch
Federated Hermes Impact Opportunities Maximum Drawdown since launch versus peers and index
Source: Morningstar, 21.12.2017 - 31.08.2020. Performance shown F share class GBP Accumulating net of all costs and management fees. Inception date is 21 December 2017.
Comment: Since launch the fund is second decile in the IA Global peer group. This performance has been maintained since Ingrid Kukuljan took on responsibility of the fund in February 2020, with the fund once again delivering second decile returns during the difficult 2020. One of the standout characteristics of the fund is the large underweight to US companies with 37% currently allocated to the country versus the 58% in the index. This is notable because outperformance has been extremely hard to come by in global equities for managers without a high US weighting due to the amount of outperformance that has come from the US and US technology in particular. Indeed the fund is notable absent technology stocks with just 7.1% of the fund invested there and yet that hasn’t hurt performance - this is extremely rare for a fund in this sector and even more so for a fund which has ESG stock selection criteria at its core. Instead the fund has tilted itself heavilty towards healthcare stocks, with nearly half of the fund invested in the sector.
Comment: The portfolio was robust during the Coronavirus sell off, with the portfolio’s maximum drawdown - based on monthly data points - 14.2% versus an 18% loss made by the average fund in the peer group and a 17% decline in the value of the MSCI ACWI IMI index
Past performance is not a reliable indicator of future results.
1. Source: Federated Hermes as at 31 August 2020. F share class GBP Accumulating net of all costs and management fees. Benchmark is the MSCI All Country World IMI index. Inception date is 21 December 2017.
The value of investments and the income from them can fall as well as rise and you may not get back the original amount invested. Past performance is not a reliable indicator of future results. For professional investors only. Further information on the Fund and any associated risks can be found in the Fund’s Key Investor Information Document (“KIID”), the prospectus and Fund Supplement. These documents are available at https://www.hermes-investment.com/ie/.
PROPRIETARY ESG RATINGS PROVE THEIR WORTH
Environmental, social and governance (ESG) analysis has become integral to our investment process. Until recently, most finance professionals were trained to rely chiefly on company-specific financial analysis when making investment decisions. But the majority of studies show that sustainability factors, from climate risk to worker welfare and executive pay, can have a material impact on long-term profitability and, in turn, investor returns. We have therefore integrated ESG considerations across our investment franchises over the past three years, in addition to launching a range of strategies for specific themes such as water and waste, and carbon reduction. CREATING FORWARD-LOOKING RATINGS Dozens of ESG rating systems have sprung up over the past few years to help investors better understand the substance of companies’ sustainable characteristics. Many of these providers deliver a solid, high-level overview of an issuer’s sustainability. But every system has its own methodology, which can lead to different ratings for the same companies over different time horizons. Data is often self-reported, broad-brush and based on backward-looking disclosures. We created our own ESG ratings because we needed a forward-looking assessment that could evaluate the opportunities that sustainability factors can create in detail, in line with our active approach. Our proprietary ratings focus on the core sustainability topics for each sector, explicitly tying these to our investment decision-making. Critically, these forward-looking ratings also link directly to our active engagement policy. Our ratings are based on systematic analysis at the subindustry level by our 150 equity and fixed-income analysts. Our investment teams interact with around 16,000 company management teams a year, working closely with our Sustainable Investing team to engage with companies on material issues. Our analysts combine these company specific insights from those meetings with industry analysis, competitor analysis and perspectives from many external data providers. Together these demonstrate the impact of non-financial factors such as reputational issues, supply-chain management and regulatory change. Fidelity analysts also formally indicate whether they think a company ESG’s performance is improving, deteriorating or stable. This enables a thorough analysis of a company’s likely future prospects, as action on these issues becomes increasingly correlated with financial performance. This proprietary system has been used to rank 4,020 issuers for ESG since its launch in June 2019 and, significantly, recent research found that higher-rated companies outperformed their lower-ranked peers in the first broad-based market crash of the sustainable investing era. Strong sustainability indicated better resilience during the Covid-19 crash in the 37 days between 19 February and 27 March 2020, the S&P 500 fell 25%. The shares of companies with the highest Fidelity ESG rating of A dropped, on average, by 23.1%. Those rated B fell a bit more - in line with the broader market - while those rated C, D and E fell further still in a remarkably linear fashion (see table below). On average, among the 2,689 companies analysed, each ESG rating level was worth 2.8 percentage points of stock performance versus the index during that period, demonstrating a strong correlation between sustainability factors and returns. The trend was similar across fixed income markets, where securities with higher ESG ratings performed over 10 percentage points better during the Covid crisis period. While this research only captures a very brief period, it bears out our hypothesis that companies with strong sustainability characteristics are likely to demonstrate greater resilience during downturns.
MOVING BEYOND “CHEAPEST IS BEST” Incorporating ESG measures provides our analysts with a 360-degree stakeholder view that allows them to move beyond the idea that “cheapest is best”. This is especially true in the era of coronavirus, in which the social element of ESG is in the spotlight. For example, a financial-only perspective of two grocery companies would favour one that was cutting costs, even if that meant making employees work long hours without PPE equipment, over another that prioritised worker and customer welfare through robust social-distancing policies and PPE provision. Yet, as more customers opt for quality and safety during the pandemic, the second company’s long-term prospects look brighter. A recent high-profile example of where our forward-looking ESG ratings have anticipated potential risks is Wirecard. Our analyst rated the issuer an E (the lowest possible) many months before the public scandal broke, on account of significant failings in corporate culture, the management of ethical risks and stewardship at board level. Another has been boohoo.com, whose stock fell on revelations of poor working conditions in its factories. Our analysts rated it a D in 2019 due to concerns about labour standards, low wages and fast fashion wastage. A third-party provider had rated it a double A.
Marty Dropkin
Ned Salter
Fiona O’Neill
Head of Asian Fixed Income
Head of Equities - Global Research & Asia Ex Japan Investment
Director - Global Equity Research & Sector Investing
Snapshot of stock returns during the crisis by Fidelity ESG rating
Source: Fidelity International, May 2020
High quality ESG leads to better fixed income returns
Source: Fidelity International, June 2020
CONTINUOUS EVOLUTION As the world evolves, our ESG ratings will evolve with it. Over time, we will expand our ratings process and offer this capability to clients to use across their portfolios. Our range of sustainable ETFs deploy our ratings, and we are looking at other ways to harness their qualitative power within systematic, as well as active, portfolios. Investors and society are more focused than ever on ESG, and in a manner that seems likely to last. As a result, we expect more capital to be allocated to companies and sectors that deliver both financial and social returns. With sustainability no longer an optional extra but embedded in investment analysis, Fidelity’s ESG ratings provide our investment teams with a much richer data set that they can use to make better, more informed decisions on behalf of our clients.
Engagement in 2019 at a glance
Engagement by region
How Fidelity voted in AGMs
Non-voting engagements by theme
Voting engagements by theme
Engagements by category (non-voting)
This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Investors should note that the views expressed may no longer be current and may have already been acted upon. Past performance is not a reliable indicator of future returns. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. A focus on securities of companies which maintain strong environmental, social and governance (ESG) credentials may result in a return that at times compares unfavourably to the broader market. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0920/32248/SSO/NA
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INSIDE BLACKROCK’S SUSTAINABLE INDEX INVESTING ARM
WHY SHOULD INVESTORS CONSIDER AN INDEXING APPROACH WHEN IT COMES TO INVESTING SUSTAINABLY? For decades, investors have been choosing an index approach to actively pursue the goals that matter most to them. Today, as more and more investors are recognising that considerations relating to environmental, social and governance factors can impact long-term returns, indexing is increasingly helping them transition to portfolios that better reflect their sustainable and financial goals. We see indexing very much as a technology that has a key role to play when it comes to democratising access, improving transparency and providing choice. There is no one size fits all approach to sustainable investing. It means different things to different investors depending on their specific sustainability and financial goals. For some, it simply means screening out controversial businesses, while for others sustainable investing is also about focusing on specific topics, such as climate change, to generate measurable, positive change. Indexing is putting investors across the continent in control of how they would like to express sustainability in their portfolios. Indexing is also helping to transform the sustainable investing industry, a category still filled with jargon and surrounded by confusion, by bringing transparency to a fund’s investment holdings and standardizing reporting metrics for how we assess the sustainable credentials of each fund. This transparency creates cost-effective, actionable exposures that make sustainable portfolio construction more efficient and ultimately puts investors back in control over their sustainable and financial outcomes. What is most exciting is that the growth of sustainable indexing is still just getting started. Indexing has a critical role to play in the way investors are transitioning to sustainable portfolios and we believe assets in sustainable index investments will surpass $1 trillion in the next decade. ¹ HOW DO YOU EXPECT THE LANDSCAPE TO EVOLVE FOR SUSTAINABLE INDEXING IN THE FUTURE? Investors are becoming increasingly comfortable in switching their standard benchmarks to sustainable investments. A big element of this has been the improvement that we are seeing around coverage and the growing body of sustainability data. We’re coming from a big shift in preference that has really concentrated on traditional benchmarks and we’ve looked at adjusting benchmarks to cater to a key set of preferences. These preferences are concentrated around screening out certain sectors or companies in which investors no longer want to be exposed to. We believe this was very much the first wave; the second big preference relates to a more holistic approach that really looks at a deliberate integration of ESG data, and this is where the role of rating agencies and data providers has become critical. We have the ability to build indices in a more transparent fashion based on this ESG data. Going forward, I think there’s going to be a vertical evolution, meaning that, within the industry’s current spectrum of sustainable investments, we expect more and more granular exposures to develop across asset classes and segments (such as sectors and regions). Climate change is of course going to remain a preference that investors will look to integrate into everything involving sustainability. But there’s also a lot of investor interest in governance themes, such as inclusion and diversity, as well as social themes, such as employee care and the actions of a company in the society where it operates. These topics have become increasingly important to investors amid the pandemic.
THERE ARE SEVERAL WAYS TO INVEST SUSTAINABLY WITH INDEXING. DO YOU THINK ONE WILL WIN OUT AS THE REGION’S MOST POPULAR OR WILL WE EXPECT ADOPTION ACROSS THE BOARD? From a product development perspective, it was hard to choose where to prioritise the product development, but the notion of providing choice has been very much at the centre of our efforts. Offering investors choices has helped us accelerate sustainable investing adoption because client preferences are still so different across geographies and client segments. Traditionally, you’d see some countries – for example, the Nordic and the Netherlands – where they’ve actually been quite advanced in their sustainability integration and it’s something that goes back 10 years. But now what we’re seeing is that some markets that were late adopters are really accelerating. Think about the UK advisor space or parts of the market in Southern Europe – they’re really catching up. We still need to be aware of the different stages of adoption and it’s important that we keep offering a wide range of choices to really fulfil each segment and regional flavour. From a more global perspective, we are seeing a similar pattern in the US wealth advisory segment, for example, where there is a growing demand from end investors for sustainable ETFs. Similar trends are happening all around the world and the release of regulations and government efforts around climate are only going to accelerate this further. INVESTORS SEEM TO BE MORE FAMILIAR WITH EQUITY SOLUTIONS RATHER THAN FIXED INCOME ETFS. WHY DO YOU THINK THIS IS THE CASE AND HOW DO YOU SEE THIS CHANGING IN THE FUTURE? For years, equity issuers had been easier to map because of better data and this was a universe that was prioritised when it comes to ESG integration. This is no longer the case as sustainable fixed income data has significantly improved. Now, if we use MSCI data to map issuers in dollar credit, the coverage is 94% and it was just under 75% in 2013.² This illustrates the magnitude in improvement in data we have seen. We expect that companies with stronger commitments to sustainability will attract more capital in the decades to come. This could result in better access to financing, fuelling increased demand for bonds issued by more sustainable companies and lowering their cost of capital. This is a key element driving issuers’ sustainable considerations and disclosures and extends beyond the corporate space. Investors’ commitments to sustainability and scrutiny of issuers also impact government bonds, with many investors now using climate risk metrics in particular as a measurable way to evaluate a country’s sustainability profile. The big topic in fixed income benchmarks is around sovereign issuance, specifically around climate: What is the level of government preparedness when it comes to the transition to a low carbon economy? What is the level of investment in renewables and so on? These are very comparable metrics that can help evaluate sovereign issuance. DO INVESTORS HAVE THE SAME TOOLKIT TO BUILD A MULTI-ASSET PORTFOLIO SUSTAINABLY AS THEY WOULD TRADITIONALLY? We have made a lot of investments in our sustainable investing capabilities and it is part of Blackrock’s commitment to work closely with index providers and data providers to enable investors to switch from standard market benchmarks to sustainable alternatives. We have started to tap into equity factors like minimum volatility and segments of the fixed income market such as high yield or ultra-shorts and will continue to push for innovation in the space to ensure investors have all the tools they need to build a sustainable portfolio. In order to enable this transition, the involvement of broker dealers will be critical. They have created an ecosystem where these instruments are more frequently traded at competitive spreads, which minimizes transaction costs for investors looking to switch towards sustainable alternatives. Wealth distributors are increasingly building out sustainable portfolios to offer choice to their clients, and, in certain markets, are even looking to make it the default option for investors. This is further proof of the relevance of indexing in enabling this transition and making sustainability mainstream for every portfolio. For more information please visit iShares.com/uk. ¹ BlackRock, as of September 25, 2020 ² MSCI ESG Research, as of May 31, 2020 Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Issued by BlackRock (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. ©2020 BlackRock, Inc. All Rights reserved. 1325866.
Manuela Sperandeo discusses the opportunities that can be found in sustainable indexing and what the future holds for the industry
Manuela Sperandeo
EMEA Head of Factor, Sustainable and Thematic ETFs at BlackRock
iShares offers a range of ESG approaches for major indices, catering to client requirements. Example: MSCI World
CAPITAL AT RISK
Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. 1367075.
IMPACT INVESTING FOR LONG-TERM SUSTAINABILTY
1. How did you get involved in impact investing? It was by chance that I ended up on M&G’s positive impact team. I was interviewing for an insurance analyst role, which had been my background. But my first interview at M&G happened to be with John William Olsen, who afterwards mentioned that he was about to launch an impact fund. When he explained the proposition it immediately drew my interest. It was an opportunity to, first of all, look at companies outside of the insurance space, but more importantly there was the added challenge of trying to consider how companies are bringing about positive environmental or social impact. That was something I had never fully come across before. I had an understanding of ESG investing, but not so much of impact. I was instantly intrigued by the idea and opportunity. 2. What skillset do you think an Impact analyst should have? With impact investing, it’s not just about the financials, which are always important, but it’s also about understanding business models and how revenues might be tied to an impact activity. When you think about the sustainability of companies, it’s not just about whether the dividend yield is sustainable over the long term, or if they’ll be paying out to shareholders the way they should be. You’re also thinking about how and to what degree the company’s revenues link to the UN’s Sustainable Development Goals (SDGs). The question you need to answer is whether this is a company that will continue doing the right thing, because its impact activities are tied to its financial profitability and overall long-term sustainability. 3. How do you balance financial and impact analysis? It’s key to have both. When we invest in impact companies, it’s very important that they still have good business models. We’re looking for quality operations with financials that indicate a good future, because ultimately if you have an impact company that doesn’t have a sound financial outlook, it might cease to exist in the next three to five years. It can also be the other way round: we often see good business models but then our analysis reveals the impact is not really there. Our framework is based on triple-i investing: investment, intention and impact. We’re trying to get companies to score above average for each of these three criteria in order to be eligible for our watchlist. It’s a way of sense-checking that a company has the investability, the quality of business model, as well as the ability to generate a positive impact over the long term. Our ultimate goal is to outperform our benchmark while also generating positive impact. That’s key to how we look at every company before adding it to our watchlist and into our fund.
5. How complex is it to calculate individual companies’ impact? That’s probably the most challenging part of the job. Environmental companies can be easier, because they can measure against carbon footprints and CO2 emissions saved. But the social side is often more difficult. For example, it’s easy to say a school is impactful because they’re helping to educate people, but the reality is, while companies are very good at telling you how many people they’ve reached with their solutions, they’re not as good at articulating how those people benefitted from those solutions. So it’s not just about the hours of tuition, it’s also about the opportunities a student gets after they’ve finished studying. The social side is the biggest challenge, because the impact won’t always be as obvious or tangible. It’s something that might come to fruition over a space of ten years, for instance. Continuing the education theme as an example, if we’re considering a company in this sector for investment, one of the key questions we’d ask is how they track the outcomes of students once they leave? 6. How do you see the future of impact analysis evolving? We’ve seen the significant strides that ESG reporting has made. It would be good if impact could evolve to a level where we’re also getting rich datasets, where companies are thinking more meaningfully about how they communicate and the impact they generate. I’d like to think that companies are going to be thinking more meaningfully about what their role is in society when thinking about these topics, whether it’s how we’re improving the environment or how we’re helping the societies that we serve and how we can measure that. Having seen the strides that ESG reporting has made, I’m optimistic that it will improve over time and make impact analysis more mainstream, make it better understood across various industries, and influence how investors think about the companies they invest in. There’s a lot of opportunity out there especially as companies become better at communicating what their impact is and disclosing their impact metrics. That’s going to widen the scope of the kinds of companies investors can choose from, as going on analysis alone you can find many companies that are potentially impactful, but unfortunately they just can’t communicate it, and if you can’t communicate or measure impact, it becomes very difficult to make a case for it. So even improving the disclosure data should widen the scope for many more companies to become investment opportunities from an impact standpoint.
Thembeka Stemela Dagbo
issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.
Deputy manager of the M&G Positive Impact fund Thembeka Stemela Dagbo talks through the intricacies of analysing companies for impact and how better data will widen the scope for investors seeking to make a difference and not just returns
Deputy manager
The question you need to answer is whether this a company that will continue doing the right thing, because its impact activities are tied to its financial profitability and overall sustainability in the long-term.
4. What are some of the companies you’ve analysed that fit these criteria? Safaricom is a telecommunications company in Kenya that has been able to significantly enhance the penetration of mobile data and mobile services, to the point where Kenya is now probably one of the best-connected regions in Africa, in terms of mobile reach and mobile services. The company also has a mobile payments business called M-Pesa, and through this service it’s been driving a lot of financial inclusion. People who ordinarily wouldn’t be able to open a bank account or wouldn’t be able to have a credit history can now transact using their mobile phones: this also means they are building up credit history to get more credit down the line. So, it ends up being a two-fold impact from a social perspective, where Safaricom has invested in infrastructure to allow greater mobile reach, while at the same time it’s created financial inclusion through its payments business. On the environmental side, about a year ago we began investing in Rockwool, a building solutions company that makes insulation using stone wool technology. Stone wool is an insulation created by crushing and melting rock. Rockwool is especially impactful because stone wool is among the best insulators there is – The EU estimated that insulation can reduce the heating needs of a building by up to 70%, thereby significantly reducing the carbon footprint of a building over time.
HOW COVID-19 IS ACCLERATING CHANGE IN THE INVESTMENT WORLD
It takes a crisis to really put the sustainability of businesses to the test, says George Crowdy, the recently hired fund manager of Royal London Asset Management’s new Global Sustainable Equity fund. Part of RLAM’s £7bn sustainable range, the Global Sustainable Equity fund was launched in February just as the Covid-19 pandemic was beginning to take hold in Europe. Crowdy, who joined the firm after a decade at Janus Henderson to manage the fund alongside Citywire AAA-rated Mike Fox, says the current crisis has highlighted the importance of sustainable investing and accelerated existing trends in digitisation and healthcare. Speaking to Citywire, Crowdy and Fox discuss their investments, the changes they expect to take place as a result of Covid-19, and how the range has been performing through the crisis. This interview has been edited for length and clarity. How have you adjusted your portfolios in response to Covid-19? GC: In many cases we’ve not changed our portfolios that much as a result of Covid. It’s more that our whole approach of investing in companies that provide solutions to the world’s environmental and social trends has become of greater importance. We were big believers in the need for more resilient healthcare systems around the world and Covid has really highlighted that. Equally, every single industry around the world was on a path to adopting more technology and digitising, and clearly that’s become essential. In some cases, I think that’s been accelerated by up to five years. MF: I think investment strategies today should be what it was six months ago but more. More digitisation, more decarbonisation and more focus on healthcare. The area that we have spent the most time on in the last six months is the acceleration of the digital economy. One lesson of the pandemic is that if you don’t put the investment into infrastructure ahead of time, then when it’s too late, it’s too late. What structural changes do you expect to take place in terms of sustainability following the pandemic? GC: Prior to Covid, a lot of investors were focused on the environmental aspect of companies. Now, the social side, which is generally much less quantifiable, has become much more important. The Covid crisis has shown how different companies treat their employees, deal with customers and their competitors, and the communities in which they operate in a challenging and uncertain environment. It takes a crisis to really put that to the test. We’ve been generally very impressed with how companies in our portfolios have responded in the past few months. Covid-19 has also been another example of a truly global crisis. Alongside things like climate change, it has highlighted how the world needs to act as one to address these significant sustainability challenges. We really hope the world can realise that to address these challenges it will take global collaboration. What are some of your key holdings? MF: AstraZeneca, along with Roche in Switzerland – which we also invest in – are the leading cancer franchise. They are not just working on and already delivering next generation cancer treatments in areas such as lung and breast cancer, they are fundamentally changing patient outcomes. They are good examples of companies where their products and services have a strong social benefit. Another is Microsoft, which is at the centre of the digitisation of the global economy, not only because it offers cloud computing services, but software as well. If this pandemic happened 20 years ago, the social consequences of it would be materially higher because people could not just work from home.
You’re also invested in Amazon, which some might consider as having ESG issues, so how does it fit? MF: We first took up a holding in Amazon in 2013. We were interested in the cloud computing business. We do think cloud computing is environmentally efficient. I think majority of people are quite comfortable with that part of the business. The online retail business is where you get different opinions. I think the debate is different today than it was six months ago. Today it’s much more evident that it is almost essential infrastructure. It has been a bit of a lifesaver for a lot of people recently. It is a business, because it does disrupt the traditional high street, that causes some controversies. No company is perfect, but overall we do think there is more evidence that it plays a positive role than otherwise. What have been the biggest contributors to performance? GC: We’ve had very strong performance this year and there are a few reasons for that. The strategy is about investing in companies providing solutions to problems. In a time of global crisis, that’s really important because those businesses often see accelerating demand as a result. We’ve had an overweight position in both the technology and healthcare sectors, which I think are probably the best examples of two sectors that have had their importance highlighted more than others. On the technology side, in addition to companies such as Microsoft and Amazon for cloud computing, we are invested in software companies such as Adobe, Salesforce and Autodesk, which have really been there to help companies and industries digitalise. We continue to invest in various semiconductor companies, which we see as kind of the backbone for a digital and connected society. They are particularly important when you think about new technologies such as electric and autonomous vehicles. It has also been what we haven’t invested in. Our sustainable process steered us away from areas like energy and travel, which were some of the areas in the market that were impacted the most.
All information is correct at September 2020 unless otherwise stated. Issued October 2020 by Royal London Asset Management Limited, Firm Registration Number: 141665, registered in England and Wales number 2244297; Royal London Unit Trust Managers Limited, Firm Registration Number: 144037, registered in England and Wales number 2372439; RLUM Limited, Firm Registration Number: 144032, registered in England and Wales number 2369965. All of these companies are authorised and regulated by the Financial Conduct Authority. Royal London Asset Management Bond Funds Plc, an umbrella company with segregated liability between sub-funds, authorised and regulated by the Central Bank of Ireland, registered in Ireland number 364259. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland. All of these companies are subsidiaries of The Royal London Mutual Insurance Society Limited, registered in England and Wales number 99064. Registered Office: 55 Gracechurch Street, London EC3V 0RL. The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Royal London Mutual Insurance Society Limited is on the Financial Services Register, registration number 117672. AL RLAM P 0025
George Crowdy
Sustainable Fund Manager
Mike Fox
Head of Sustainable Investments
For professional clients only, not suitable for retail investors. Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the contributor's own and do not constitute investment advice. Portfolio characteristics and holdings are subject to change without notice. This does not constitute an investment recommendation. For more information on a fund or the risks of investing, please refer to the fund factsheet, Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk
RLAM’s rich heritage in values-based investing
The Co-operative Asset Management
Co-op AM launches its first sustainable fund Sustainable Leaders
Co-op AM adopts a new sustainable investment research process and launches more funds
Co-op AM starts publishing its voting record online
RLAM acquires Co-op AM including its sustainable fund range and in-house team of responsible investment experts
Royal London Asset Management
RLAM is created
RLAM becomes a signatory to the UN-supported Principles for Responsible Investment (PRI)
RLAM launches Ethical Equity Fund
RLAM signs up to the FRC’s Stewardship Code
RLAM publishes its first Stewardship Statement
RLAM centralises proxy voting under one team and issues a new Proxy Voting Policy
RLAM launches two Global Equity funds that integrate ESG issues into their investment decisions
RLAM launches an Emerging Markets Tracker Fund, which tracks an ESG benchmark
The sustainable fund range passes £3.5bn AUM (at October 2019)
RLAM launches Global Sustainable Equity Fund
What have been the detractors from performance? GC: In the global fund, not all our healthcare companies have done well during this period. Some of our companies that are exposed to more elective procedures suffered as a result of those procedures being delayed this year. MF: Anything that is UK domestic has been very poor this year. We’re dealing with Covid but Brexit has also been kicking around. It’s the cheapest part of the global stock market as well but there is very little interest there.
Sustainable investing: our range
The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Source: RLAM
