The importance of incorporating the correct principals of investment above and beyond risk and return characteristics has been (and will no doubt continue to be) widely discussed. This has led to a number of different investment criteria having “industry standard” terms applied to them; Environment, Social and Governance (ESG) investing is now main stream and Sustainable and Impact Investments more prevalent alongside the more traditional ground of Socially Responsible Investment or SRI. In an era of easy access to information, where reputations are vulnerable, wealthy individuals and families are paying closer attention to how their money is invested rather than whether it just makes a good return. Therefore, it is paramount to have a common understanding of exactly what is meant when these terms are used by the Investment Manager and how it might affect the type of companies invested into.
At the same time, there is an increased appreciation that companies that adhere to these criteria are more likely to grow sustainably over time. Far from being separate to considerations of capital preservation and growth, sustainable investment criteria are part and parcel of ensuring a company will be a good long-term consideration.
The sustainable investment criteria have evolved. Previously, ethical investment took a narrow exclusionary approach “no munitions, tobacco, alcohol or oil”, for example. This has changed and there is now a smorgasbord of different approaches. It is possible to find funds that invest for ‘impact’, or in certain environmental technologies or clean energy. To our mind, it is important to invest into companies that have a positive impact on environmental and social issues and have the corporate governance in place to implement those objectives.
Headlines are effective in creating awareness around issues; who can fail to be moved by a whale dying having ingested 80kgs of plastic bags? But headlines may not be an accurate way of screening our investment options to allow informed decisions that will ensure Environmental, Social and Governance investment targets are met. A good manager will help you ensure that the companies with which the money is invested are travelling in the right direction, which can sometimes have a bigger impact than investing in one that is already there.
We take a more nuanced approach than simply investing in the companies with the highest ESG scores, incorporating impact into our investment decisions. Company A, for example, may have a natural carbon footprint, actively promote education standards in deprived areas and have a board which represents a diverse and multicultural society. This will look like a better bet that Company B with high carbon emissions, few charitable pursuits and a poorly-diversified board.
But as investors we need to ask how the invested money will make a difference. If we only invest in companies who have achieved an ESG target, will that capital be put to work effectively to ensure there are continued improvements across the industry? If the board of company B have acknowledged the criticisms levied and committed to achieving diversity targets; encouraged and supported staff to engage in local volunteering and fund raising activities for international concerns; or put in place plans to reduce their carbon footprint to neutral in 12-24 months – and committed capital to achieving this plan, our investment decision may change. This is an intentionally simplified example but illustrates the importance of a thoughtful ESG strategy.
It seems logical that if families are looking to pass their wealth down through generations, they should do so in a way that preserves their future. Most people have concerns about the environment (climate change, deforestation and pollution), but also social injustice, educational opportunities and self-determination.
We should all strive for equality across the spectrum of individual differences and promote behaviours which embrace progress in this area. These are emotive drivers which can be supported by choosing to invest in companies which proactively endorse and financially support those principles. However, when doing so we must be prepared to think deeply about the issues to ensure we are steering capital in the most effective way.
Author: Matthew Wilson has over 20 years of experience as professional investment advisor to international HNW’s, having worked in London, Zurich and the Channel Islands. Matt is based in Jersey and is a director and investment manager in Smith & Williamson International Ltd, a sister-company of Smith & Williamson Investment Management (Europe) Ltd.
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