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What do the UN Global Compact Principles mean for investors?

Please see the below article that we received from fund managers Quilter Investors yesterday afternoon:

With climate-related risks and environmental challenges seemingly at the forefront of investors’ minds, it’s important that all those involved in the investment industry adopt a broad approach when assessing the major risks facing corporate sustainability today. This should include human rights abuses and forced labour and corruption, as risks to corporate sustainability affect not only shareholders and bondholders but also other stakeholder groups including customers, suppliers and employees.

The UN Global Compact is one of the many tools that can help investors assess threats to sustainable business across the companies in which they invest.

The UN Global Compact – what is it?

Launched in 2000, the UN Global Compact is the world’s largest corporate sustainability initiative aimed at promoting corporate sustainability and encouraging innovative solutions and partnerships through 10 guiding principles.

The UN Global Compact supports companies in responsibly aligning their strategies and operations, in addition to helping them to advance broader societal change, through initiatives such as the UN Sustainable Development Goals.

It also sits alongside the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, which is another voluntary initiative to support sustainable business.

The UN Global Compact’s principle-based framework is broadly split into four key areas – human rights, labour, environment and anti-corruption – to help guide businesses in their activities in these areas. The framework is derived from numerous international declarations for companies and countries, such as the Universal Declaration of Human Rights and the Rio Declaration on Environment and Development.

The 10 Principles

Human Rights

  • Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights.
  • Principle 2: Businesses should make sure that they are not complicit in human rights abuses.

Labour Standards

  • Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining.
  • Principle 4: Businesses should uphold the elimination of all forms of forced and compulsory labour.
  • Principle 5: Businesses should support the effective abolition of child labour.
  • Principle 6: Businesses should uphold the elimination of discrimination in respect of employment and occupation.

Environment

  • Principle 7: Businesses should support a precautionary approach to environmental challenges.
  • Principle 8: Businesses should undertake initiatives to promote greater environmental responsibility.
  • Principle 9: Businesses should encourage the development and diffusion of environmentally-friendly technologies.

Anti-corruption

  • Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.

Protection of human rights

Principles one and two relate to the importance of businesses to both support the protection of human rights and ensure that they are not complicit in human rights abuses.

A company that may be deemed to be in violation of the human rights principles could have revenue exposure to jurisdictions or authoritarian governments where human rights abuses are prevalent.

These companies are frequently flagged across emerging markets. For instance, an Indian port infrastructure company was flagged for being in violation of the principles given its financial ties to the Myanmar military.

However, a violation of the principles can be more explicit than this. For example, an Asian engineering and construction company was recently deemed to be non-compliant following a collapsed dam in Laos resulting in fatalities and the displacement of local communities.

Human rights is one of the main areas where investors can see which companies violate the UN Global Compact. It poses a higher risk across sectors such as aerospace and defence where businesses may be involved in the manufacture of controversial weapons.

The UN Global Compact is one of the many tools that can help investors assess threats to sustainable business across the companies in which they invest.

Labour best practice

Principles three, four, five and six are concerned with how sustainable businesses should uphold the effective recognition of the right to collective bargaining, eradicate all forms of forced (including child) labour and eliminate occupational discrimination.

Companies tend to fall foul of these principles less commonly. Following an investigation by Norway’s Council on Ethics, the forced labour risk has been particularly high in the Middle East over recent years. Migrant workers coming from India, Pakistan and Nepal face little hope of paying off the debt they owe to ‘recruitment agencies’ who have charged workers a fee for access to jobs in countries such as Qatar and the UAE.

As a result, there has recently been significant reputational damage to companies allegedly practicing forced labour in the Middle East.

Environmental responsibility

Principles seven, eight and nine provide guidance on how businesses should consider the negative impact of environmental damage, as well as the cost to a company’s reputation should a negative environmental event occur.

The principles also encourage investment in research and development around the long-term benefits of environmentally-friendly technologies.

Companies that are commonly deemed to be in violation of the environmental principles operate across the materials and utilities sectors.

For instance, an Indonesian aluminium business was found to be non-compliant given its interests in a mine that uses riverine tailings disposal (using rivers for mine waste disposal), a practice banned in many countries due to its severe environmental impacts.

Only four mines in the world engage in riverine tailings disposal, and in the case of this business, the mine in question has impacted one of the world’s most bio-diverse regions, Lorentz National Park, a UNESCO World Heritage Site.

Anti-corruption guidance

Principle 10 targets corruption in all forms, including extortion and bribery. The financial services sector is a particularly high-risk area of the market for exposure to corruption, specifically in relation to failings in anti-money laundering procedures.

Money laundering scandals have thrown the spotlight on the major Nordic banks in recent years, particularly those with exposure to the Baltic region, which has been beset by allegations of financial crime.

Our Comments

We have written about these UN Global Compact Principles in the past.

This is one of the key ESG processes that investment managers use to form their ESG screening process in relation to sustainable investments.

These principles are the foundation for investment firms who wish to bring ESG on board within their investments.

The main 2 methods of screening that investment managers use to assess whether or not the companies they choose to invest in are considered compatible with the 10 principles are positive and negative screening. Some firms go above and beyond this and look deeper, some use a combination of both.

Positive Screening is Investment in sectors, companies or projects selected for positive ESG performance in comparison to industry peers. This involves selecting firms that show examples of environmentally friendly and socially responsible business practices. This also includes avoiding companies that do not meet certain ESG performance thresholds.

Negative Screening is the exclusion from a fund or certain sectors or companies involved in activities deemed unacceptable or controversial (e.g. tobacco, arms, gambling etc). This involves avoiding companies that create negative impacts considered incompatible with the UN Global Compact Principles.

Just using these screening methods isn’t enough to ‘change the world’ so to say. It’s important that fund managers engage with the firms they are investing in, to challenge their practices to move them further along the ESG journey and ensure they are adhering to the UN principles.

ESG investing is still a new world, however, since we first started talking about it over a year ago, the ESG landscape has already moved forward, and fast.

We have more of our clients now engaging and starting the discussions around ESG and sustainable investing.

Interestingly, we listened to a compliance update earlier this week from our compliance partners, Paradigm. In this update there was a comment made that the view from MSCI is that they believe that clients will have to opt out of ESG investing in the future, rather than opt in, as they do now.

This supports the view we have had for a while now, that ESG investing will become the new normal.

Andrew Lloyd DipPFS

24th September 2021

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Giving Voice to The Quiet Revolution: Asset Management, The Environment and Popular Perceptions

Please see the below piece from Invesco received late yesterday afternoon:

Key Points

  1. As demonstrated by environmental protests against asset managers accused of “funding destruction”, the investment industry remains broadly perceived as uninterested in the existential challenges facing humanity.
  2. Contrary to such perceptions, asset managers have taken a lead in promoting sustainable policies and practices – especially through active ownership of and engagement with the companies in which they invest.
  3. It is vital that this “quiet revolution”, as the University of Cambridge has described it, builds wider recognition and that stakeholders of all kinds appreciate that their interests may be aligned with those of asset managers.

More than a decade on from the global financial crisis, the investment industry is still popularly perceived as a self-serving entity with little or no regard for the greater good. Before the COVID-19 pandemic curtailed mass gatherings, environmental activists’ demonstrations – including several against financial services companies said to have “funded destruction” – provided a clear reminder of how negatively this sphere is viewed by many of those outside it.

Former President of Ireland Mary Robinson, now a UN Special Envoy on El Niño and Climate, even suggested that Extinction Rebellion protesters should specifically target asset management firms. This tactic, she said, would lessen the likelihood of the group alienating members of the public.

Such a sentiment underscores the degree to which asset managers, routinely cast as essential cogs in the machinery of “big business”, are deemed complicit in many of the world’s ills. Yet it also implies that they can bring about positive change; and what appears to be consistently overlooked, at least in the mainstream narrative, is that this is exactly what they are doing.

The first decade of the 21st century exposed the limits of capitalism as we long knew it. There is no disputing this, just as there is no disputing that the resulting backlash against sections of the investment industry was deserved. Yet capitalism always has been and still is a work in progress: it has evolved substantively in seeking to avoid the errors of the past, and asset managers have been at the heart of the unfolding shift.

This is because responsibility, sustainability and long-term thinking are becoming norms for the sector. Asset managers are spearheading what the University of Cambridge has described as a “quiet revolution”, and the reality – unlikely though it might seem to some critics – is that many investment professionals have a deep and even long-held commitment to the future of the planet and its inhabitants.

A passion for the environment is not some sort of obligatory extension of work for such individuals. Quite the opposite: work is a potent augmentation of their passion for the environment. This should be acknowledged far beyond the industry – not because asset managers yearn to be loved or are tired of being harangued by climate campaigners but because stakeholders of every kind need to comprehend that there is a massively important alignment of interests here.

Contrary to widespread assumptions, asset managers are not fiercely determined to thwart efforts to make the world a better place. In fact, many want to be central to such endeavours. In this paper, drawing both on our own experiences and on insights from leading researchers, we seek to show that the quiet revolution is well under way; we attempt to highlight a more “human” side to the people behind it; and we try to explain why it merits much broader recognition.

Along with the investment industry in general, asset managers have attracted considerable criticism in recent years. With past sins still largely informing mainstream opinion, the scorn of the broader public – from environmental protesters to media commentators to the proverbial man and woman in the street – seemingly remains as strong as ever. Overturning such firmly entrenched disdain and distrust will not be straightforward. The investment industry as a whole has often made headlines for the wrong reasons, and the popular realisation that it has a much more admirable side will unquestionably take time to emerge.

The quiet revolution has been under way for several years. Maybe now is the time to make more noise about it – not for the sake of asset managers’ self-esteem, not because we demand due recognition, but because how we and our efforts are regarded and understood is likely to determine our effectiveness in helping plot a truly responsible course for the future.

This article is another indicator of the direction of travel within the industry. ‘Ethical’ and ‘Socially Responsible’ investment themes have always been there in the background, but over the past two years and especially since the onset of the pandemic, it no longer seems to be in the background.

Almost every fund manager now has to take into account ESG factors within their investments and portfolios whether they are doing so because they believe its right or because they now see that they have to in order to keep up, either way, its still a good push in the right direction.

People are waking up to making the world a better place, be it via social issues or climate issues.

Investors now seem to take comfort in the fact that they can help and ‘do their bit’ to help make the world a better place.

Andrew Lloyd DipPFS

17/06/2021

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Sustainable fashion: Why it matters, and how to identify the winners

Please see the below article from JP Morgan received yesterday, 26/04/2021:

The concept of sustainability is rapidly rising up the agenda within the fashion industry. Yet while consumers are increasingly interested in sustainable fashion, they are not willing to pay a premium for it. Still, sustainability can be a competitive advantage. We have seen companies delivering a sustainable message, but identifying the true leaders from the potential greenwashing takes research.

Consumers care about sustainabilty, but not at any price

As the global population grows, the negative environmental impacts of our demand for fashion are becoming more apparent. The industry is responsible for 10% of global carbon emissions and 20% of global wastewater, as well as producing significant amounts of waste. The equivalent of one garbage truck of textiles is dumped in landfill or burned every second.

75% of consumers view sustainability as ‘extremely’ or ‘very important’ in their fashion purchasing decision. And over 50% of consumers would switch for a brand that acts in a more environmentally and socially friendly way. But in practice, are consumers really willing to pay? Not yet, it seems. Only 7% of consumers say sustainability is the most important factor in their decision making.

Exhibit 1: Consumers care about sustainabilty, but not at any price – most important factors in decision making

Consumers continue to rate ‘high quality’ and ‘good value for money’ as the most important factors in their decisions. This is backed up by our engagements with fashion companies, who claim that consumers are not willing to pay a premium for sustainability, although at the same price point they would choose the more sustainable offering.

To us, this signals that consumers have a preference for sustainability and it can be a competitive advantage for retailers. But companies need to see it as a way to maintain or grow their market share rather than a way to increase prices. Sustainable leaders should be investing in innovation and scale for sustainable solutions to bring prices down and maintain their brand position.

Case study 1

Re:NewCell: Driving down costs for sustainability in fashion

Re:NewCell is a Swedish company driving down the costs of sustainable materials through innovation. The company has developed and patented Circulose, a high quality material made from recycled clothes. We expect Circulose – which has already been adopted by the likes of H&M and Levi’s – to see increasing uptake within the fashion industry, helping to lower the cost of sustainable materials and improve the industry’s environmental footprint.

Case study 2

Adidas: Leading the charge on sustainability

Adidas, the well-known sportswear brand, is at the forefront of sustainability within the fashion industry. The company particularly stands out on circularity, which is embedded in its strategic priorities: by 2024, Adidas has committed to replace virgin polyester with recycled polyester. The company already partners with the environmental organisation Parley for the Oceans to use recycled polyester made out of plastic collected from the coastline. All of Adidas’s cotton is sustainably sourced via the Better Cotton Initiative, earning Adidas the top spot in a 2020 independent ranking on sustainable cotton sourcing. Adidas has committed to reducing greenhouse emissions across its entire value chain by 30% between 2017 and 2030, and then achieving climate neutrality by 2050. As a further validation of Adidas’s sustainability efforts, these goals were submitted for external verification by the Science Based Target initiative in February 2020.

Sources: Adidas and the Sustainable Cotton Ranking 2020 (77 companies).

The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.

Distinguishing the real from the fake

The fashion industry is highly fragmented, and sustainability standards are still in their infancy. More and more companies are reporting on both their environmental and social impacts. But with different companies focusing on different disclosures, metrics and measurement methodologies, how can we identify the best? For us, fundamental research and company engagement are key, allowing us to assess whether fashion brands are paying lip service to sustainability or whether they are truly committed to it.

What do we look for in a sustainable fashion leader? 

  • Has the company signed up to measurable targets to reduce its negative environmental footprint?
  • Is the company abiding by external certifications to demonstrate the sustainability of its products?
  • Is the company accurately measuring and reporting its entire carbon footprint?

The last of these requires particular research focus as only about 5% of a fashion retailer’s carbon footprint comes directly from its own operations (scope 1 emissions) or indirectly from generating the energy used by the company (scope 2). The vast majority of carbon emissions occur in the company’s value chain (scope 3). This includes production, processing and transportation of fibres and fabrics, transportation of the end product to its final destination, and emissions related to use, care and disposal. Unsurprisingly, this complexity means that emissions are currently underreported, with many companies only reporting on transportation of the end product. Fundamental research is therefore key to understand the supply chain picture and determine what companies are really doing to reduce their total emissions.

Conclusion

While price sensitivity remains key for consumers in the fashion industry, evidence points to sustainability becoming more important in purchasing decisions and ultimately to long-term brand value. This implies a material opportunity for sustainable leaders to stand out while unsustainable fashion brands lose out. Yet the potential for greenwashing is rife in the industry, making it difficult to distinguish between leaders and laggards in the transition to sustainable fashion. Company research and engagement is key.

Our Comments

This is another example of sustainability and ESG themes filtering down to everyday life.

The fashion industry, particularly the problematic ‘fast fashion’ companies seem to hit the headlines on a regular basis for all sorts of issues, from waste to poor working conditions so the sustainability of the fashion industry is starting to be questioned more often.

With fund managers now also becoming increasingly more concerned with ESG and sustainability issues, the fashion industry will have to also adapt to these changes in the way consumers and investors are thinking and what it is they are looking for when investing or purchasing their products.

Shopping for items such as clothes became pretty much an online only occurrence for a large proportion of the past 13 months, I have myself noticed that sustainability is being used a selling point, whether it be statements on the companies website or even noted in the products description. Some companies plant a tree for every item of clothing purchased.

As this article highlights, a lot of people would consider switching to more environmentally and socially friendly brands, but they may not be willing to pay an extra premium for it. Personally, I don’t think it will be long until paying extra won’t be an issue, as the world changes and now has ESG principles under a microscope, these companies will have to adapt to remain competitive in the marketplace.

From a personal experience perspective, I recently purchased an item of clothing having no idea it was part of a ‘sustainable’ line until I was checking the label for the washing instructions only to find out that the item was made out of 100% recycled plastic bottles and textile waste that had been processed and melted down into new fibres in an effort to save water, energy and reduce greenhouses gases.

The item was no more expensive than a ‘non sustainable’ item and the quality was probably better than products that use ‘virgin’ or non-recycled materials.

As consumers, if you don’t have to compromise on cost or quality, then why wouldn’t you choose more sustainable options?

Andrew Lloyd

27/04/2021

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Jupiter: Views from the House

Please see the below look back at 2020 from Jupiter Asset Management’s Chief Investment Officer:

Jupiter’s Chief Investment Officer reflects on the longer-term implications of a year most unlike any other.

In a year overwhelmingly dominated by the pandemic, it could be tempting to dwell on the challenges that have been presented to businesses and to global society.

Long before any of us had heard – let alone uttered – the words “COVID-19,” there was a trend towards more flexible working in many sectors of the economy, including in asset management. Some in our industry were embracing growing requests for more flexible working arrangements, while others may have viewed them with a certain degree of scepticism, pondering whether fund management was the kind of industry that could accommodate such arrangements at scale.

As much of the world went into lockdown, personal opinions on the merits and disadvantages of remote working became largely irrelevant; a significant policy decision that would, historically, have been the preserve of individual businesses was essentially taken for them.

Simultaneously, the important question as to whether a firm like ours could operate effectively with virtually all employees working remotely for a prolonged and potentially open-ended period was answered; we could, and we did. Indeed, a recent conversation with our head of dealing, Jason McAleer indicated that our industry as a whole has not only coped with the challenges presented, but has seen no perceptible increase in operational errors or issues.

In my view, the changes we have seen have the potential to make asset management a fundamentally more inclusive industry. Put simply, it now feels reasonable to hope that many of those who – for oft-cited reasons, including perceptions of long hours, punishing travel schedules and reconciling the demands of a challenging career with family life – might never have considered a career in fund management, will feel newly emboldened to take a closer look.

If, like me, you believe that more diverse investment teams are better performing ones, then this can only be a welcome development from the perspective of our clients.

Inclusivity leads to diversity

The pandemic and associated changes to working patterns and practices have also reminded us of the value of the office environment, as evidenced by numerous requests from colleagues for permission – which was generally denied, in line with the official guidance at the time – to continue to work from the office as the second UK-wide lockdown came into force.

This all begs a question: how quickly will the potential benefits of changes to working patterns in our sector filter through into the reality of the make-up of our workforce? Naturally, in a profession like fund management, hiring cycles are relatively lengthy. For this, there can be no apologies; the business of taking fiduciary responsibility of other people’s money is a serious one, and it is right that those charged with this duty should first have to prove their aptitude.

Of course, recruitment decisions are largely devolved to hiring managers; while this makes it difficult to “force” change in hiring practices from above, as CIO I am committed to continuing to challenge ourselves.

Changing behaviours: impact on markets and innovation

For a business like Jupiter, one of the more testing trends to emerge over the last year has been a tangible increase in direct participation in financial markets by retail investors. The exact cause of this change in behaviour is difficult to pinpoint, but we can reasonably speculate that it may have much to do with a combination of increased market volatility creating perceptions of attractive entry points, and the simple reality of the increase in available time many people have found in lockdown.

Whatever the cause, there is no doubt that such a sharp increase in activity in stock markets among individual retail investors has had an impact not only on stock prices, but also on liquidity and on sources of liquidity.

For asset managers, this potentially disruptive trend should act as something of a wake-up call; as retail investors in growing numbers show signs of exploring different ways to put their money to work, we must remain relevant, and continue to demonstrate that our products offer value.

As a firm, we place great emphasis on the importance of fostering innovation. A particularly exciting development for us in this regard was the formalisation earlier in the year of our strategic partnership with US-based NZS Capital, LLC (“NZS”), a highly innovative investment boutique which itself focuses on identifying disruptive businesses with the potential to generate favourable outcomes simultaneously for investors, customers, employees, society, and the global environment.

2020: when ESG became truly “mainstream”

Our partnership with NZS also serves as a timely reminder of our commitment to innovation and leadership in the field of ESG investing, a topic that has enjoyed a meteoric rise in prominence over the course of the last year. Indeed, I would be unsurprised if, in the future, social anthropologists looked back on 2020 as the year ESG investing became truly “mainstream.” This is an overwhelmingly positive development, and one to be embraced.

From a fund management perspective, I believe that ESG in the years ahead will be a refinement, evolution and re-categorisation of many of the assessments managers already make when looking at an investment case. How is a company run? Do its activities and/or products cause detriment to the environment? Are its employees mistreated or endangered? Does it mistreat its customers in a way that is detrimental to them and unlikely to build long-term loyalty? Has it taken on excessive leverage in pursuit of short-term shareholder returns that might undermine its longer-term viability? For us, these are not new questions, but they are being asked of us by a broader range of clients and other stakeholders, and with a frequency and determination not before seen.

Such focus on these issues is having a marked effect on markets, and on the way in which capital is being allocated to investment managers. This, in turn is undeniably changing and disrupting perceptions of the characteristics of a business most prized by investors.

The “what” and the “how” of asset management

I believe that the single most important thing we can do as a business is to generate strong and sustainable investment returns for our clients. As the end of every year approaches, we take the time to reflect on our performance; for a year that is likely to stand out in the collective memory for many of the “wrong” reasons, in this particular regard, 2020 has been a year much like any other.

The change, challenges and uncertainties we have all faced notwithstanding, it is pleasing to see that many of our strategies have performed very well throughout this period. Meanwhile, the new colleagues who joined Jupiter through our acquisition of Merian Global Investors have already made a significant contribution to Jupiter, bringing fresh energy, ideas, and perspectives to our debates.

But investment and performance are not the only things about which we hear from clients, who increasingly want to know how a firm like Jupiter manages its money managers. This is perhaps the most important part of the role of the CIO office, and it has been a privilege to speak with so many clients over the course of the year about how we seek to hold our fund managers to account. Put another way, it might be said that in 2020, what we seek to do (generate strong, sustainable investment performance), and how we go about it have become first among equals in the pecking order of clients’ priorities.

In truth, nobody knows how 2021 will play out. With the promise that vaccine programmes may be imminently deployed, a final end to the next chapter of Britain’s exit from the EU in sight, and a the potential for a more stable geopolitical scenario, it is tempting to look forward to the coming year with a great sense of optimism. At the same time, none of us must be under any illusion over the scale of the challenges facing the global economy as the world emerges from the pandemic. Whatever happens, our focus in the CIO office will be on seeking to ensure we deliver the best performance we can, in the most sustainable way we can; it is this pursuit, I believe, that gives us our real licence to operate.

As the end of every year approaches, reflections on the year we are about to leave behind tend to come naturally to everyone.

Look backs at the financial world and investment markets pour out from fund managers followed by outlooks, predictions, and goals for the year ahead.

2020 was a year that nobody could have predicted, and a year I’m sure nobody will look back fondly on.

One of the (positive) key points that can be taken away from this year (as demonstrated in the article above) is something we have been talking about for a while now, ESG is now mainstream.

It’s real, it’s important and it’s here to stay.

From firms and fund managers beginning their ESG journey, to the ones talking about how they already factor in a strong ESG process within their operations.

Whatever our industry takes away from this year, one thing is for sure, ESG is now firmly on everyone’s radar.

Andrew Lloyd

08/12/2020

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Janus Henderson ESG Thought Pieces and Our Thoughts

Investment Management House Janus Henderson recently published some thought pieces on ESG and Socially Responsible Investing. Please see the key takeaways from these pieces below:

Sustainable equities: the future is green and digital

  • The pandemic has accelerated investment into digitalisation, which we consider to be a key enabler of sustainability.
  • We expect support for sustainable development to gain momentum as countries embrace the need to be low carbon and as Joe Biden takes his seat in the White House.
  • Investment into electric vehicles is expected to surge in 2021 as innovators ‘race’ to the top.

Sustainable design in consumer products

  • The apparel sector is well known for its detrimental effects on the environment. However, as consumers become more aware of their own environmental footprints, there has been a surge in demand for sustainable goods.
  • A circular economy is based on the principles of designing out waste and pollution, keeping products and materials in use, and regenerating natural systems.
  • Companies including Nike, Adidas and DS Smith have incorporated a circular approach to the design and production of their goods, creating durable and long-lasting products with a reduced environmental footprint.

Investing in Diversity: analysing the investment risks and opportunities

  • Companies are increasingly being held accountable by consumers who reward brands aligned with their values.
  • For many global businesses, matters of diversity and inclusion go beyond the workplace, and efforts are made to address discrimination in the countries in which they operate.
  • Investors should be wary of companies that fail to futureproof themselves in terms of diversity. Socially conscious brands that make inclusivity a central part of their business strategy and brand ethos are more likely to succeed.
  • What gets measured, gets improved. Investors should focus on company disclosure, diversity-related targets, and meaningful initiatives in place. A list of suggested investor questions can be found at the end of this paper.

Janus Henderson are ahead of the game with ESG policies and started factoring this in back in 1991 shortly following the 1987 United Nations Report, ‘Our Common Future’ which I mentioned recently in an ESG blog. Their philosophy is below;

‘We believe there is a strong link between sustainable development, innovation and long term compounding growth.

Our investment framework seeks to invest in companies that have a positive impact on the environment and society, while at the same time helping us stay on the right side of disruption.

We believe this approach will provide clients with a persistent return source, deliver future compound growth and help mitigate downside risk.’

As I wrote about in our blog, as a firm we undertake regular due diligence with regards to the investments we recommend to our clients. This an ongoing process and we are constantly monitoring the market, and this year ESG has become a key factor in what we look for in the due diligence process.

Of course, many businesses may have a broad and generic ESG statement, but having a strong and well defined ESG process embedded into a businesses culture and investment process is definitely one of our key determining factors in the companies we choose to recommend.

We start off with an investment houses ESG statement, but then we dig deeper, to make sure these investments do exactly what they say they do, in terms of ESG, then factor this into the rest of our research i.e. investment returns, track records, cost etc.

It’s good to see so many investment houses now openly talking about and promoting ESG and demonstrating their views and philosophies.

Now could be a great time to invest whilst asset prices are still generally low, all whilst taking a responsible approach to investing!

As always, keep checking back for a variety of blog content from a wide range of investment houses, fund managers and our own original pieces.

Andrew Lloyd

04/12/2020

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ESG… the ‘new normal?’

Firstly, yes, this blog is called ‘the new normal’ and yes, I know you may be fed up of this phrase (believe me, I am too!), but dare I say it? Is ESG ‘the new normal’ when it comes to investing?

You may have seen some of our posts over this past year on ESG and sustainable investing.

We posted a 3 part series over the summer called ‘What is ESG? – An Introduction’, this was written by us to help our clients really understand what ESG is, and it’s a good thing we did… a recent study was undertaken in this industry and it was found that the majority of clients didn’t understand what ESG was, in fact it was found that people thought it stood for ‘ethically sourced goods’.

Google searches also show an increase of 216% in the term ‘ESG’ since 2018. This shows if people don’t know what it is, they want to learn.

Over the summer we wrote;

‘What does ESG stand for?

ESG stands for Environmental, Social and Governance

But what is it?

Investopedia definition for ESG is;

‘Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.’

ESG is more of a theme or a set of principles to follow rather than a single set principle.’

In case you missed it, please revisit this blog series using the following links: What is ESG? – An Introduction – Blog Series – Part 1, Part 2 and Part 3.

One Planet, One Society, One Economy

ESG is a set of principles throughout not just investing, but throughout the world.

Climate change is a factor within ESG principles, but why is it important to focus on climate change?

Well we are one planet. We are one society and one economy. Yes, I am aware that sounds very ‘tree hugger-ish’… but look at how issues caused by climate change can affect society and the economy.

You will have seen hurricanes, floods, the wildfires in California and Australia on the news over the past few years. These are all driven by global warming. Since 1980, the cost of weather related catastrophises has been over $4,200Billion.

Boris Johnson recently announced that the aim is for the UK to have no sales of new fossil fuel cars by 2030.

Climate change is not an abstract future concept anymore and ESG isn’t just the latest trend, it is a future state of being, it’s an input into the outcomes of the future and it’s about companies embracing opportunities and making changes now to invest in the future.

The concept of ‘ESG’ or ‘ethical’, ‘socially responsible’ isn’t new.

Over 30 years ago, in 1987, there was a study by the Brundtland Commission called ‘Our Common Future’ which said that;

‘Sustainable development meets the needs of the present without compromising the ability of future generations to meet their own needs, guaranteeing the balance between economic growth, care for the environment and social well-being’

ESG has been gaining momentum for a while now as climate change and other social issues presented themselves but then of course, the pandemic hit.

Many investors probably assumed that the ESG focus would fade however it was only strengthened, with people looking at how everybody working from home would reduce carbon emissions, international travel was halted which again contributed to the drop in carbon emissions and early on in the pandemic when companies had to send employees off to work at home or on furlough and their mental and physical wellbeing became a focus.

Sustainable investments were once few and far between and usually meant sacrificing returns in order to stand by your beliefs, but these days, you would be hard pressed to find a company or an investment that doesn’t have some form of ESG policy or statement. Of course some may just be doing this to ‘tick the boxes’ but some will be actively involved in ‘doing the right thing’.

ESG has momentum now, we no longer think you have to sacrifice returns either!

As we have said before, ESG is not a tangible ‘thing’ that you can see or hold, it is in fact a complex interconnected system of ideas and processes.

Think of it as a journey, rather than a destination.

Andrew Lloyd

27/11/2020