Recent times have seen a remarkable increase in activity on issues of sustainable investing, not just among equity investors, but in the political arena. I do not remember politicians promising to address the issue of plastic in the oceans, but suddenly there is action. Perhaps David Attenborough is more powerful than President Trump.
When looking at where to allocate their investments, charity trustees are particularly focused on the ways in which their fund managers integrate environmental, social and governance (ESG) considerations into their research processes.
Artemis has always incorporated the principles of sustainable investment. Indeed, we find it strange when any stock selection process does not take account of ESG factors in its appraisal of a company.
One member of our team is a keen birdwatcher, often taking a day after a flight to spot new birds while recovering from jet lag. Bird populations are excellent evidence of pollution. Travelling in China and noting the total lack of birdsong illustrates the extent of pollution outside the main towns: water pollution has reduced insect counts – and thus, no flycatchers.
The environmental damage large companies caused used to be of little matter to capital markets, but times change. The Macondo oil spill saw the price of BP fall from L6.40 in 2010 to close to L3 and the shares trade at only cL5.30 at the time of writing. By way of comparison, the Exxon Valdez spill in 1989 hardly affected the share price of Exxon.
Our view, therefore, is that environmental impact is a contingent liability of many businesses and should therefore be assessed alongside other balance sheet claims and potential claims. The oil industry is perhaps the main challenge in this area.
Hydrocarbon fuel is clearly a major source of greenhouse gasses and, while the extent is disputed, these contribute to global warming. High reliance on these fuels also leads to a geopolitical dependence on fuel supplies from the Middle East, where unrest has been persistent over the last half-century.
Governments have therefore been keen to encourage a growing share of energy production from renewable sources. Pressure has increased significantly post the Paris Agreement and policy action presents both an investment risk and opportunity. As production of solar panels and offshore wind turbines has risen, capital costs have fallen and efficiency risen. We are now in a period where renewable energy supply is built without government encouragement and, in some countries, free from subsidy, suggesting longer-term decline for the hydrocarbon industry as general fuel and, more slowly, in transport fuels. As we focus our portfolios on longer-term growth sectors, we are unlikely to invest in the traditional energy sector in future.
This area covers diversity, consumer rights and other areas of business ethics. Diversity seems a focal point of modern business. As we invest globally, we see great differences between regions. While many Chinese businesses have women leaders, very few Japanese companies take advantage of this talent. However, increases in Japanese board diversity, alongside other improvements in governance, seem to have come alongside improving shareholder returns. Such progress is slow, patchy and from a low base.
Social concerns, indeed ethical concerns were behind our decision never to invest in the tobacco, gambling and armaments industries. However, ethical investment views are not always straightforward and can change over time. It was not long ago that one might have owned diesel car-makers to reduce pollution by replacing petrol vehicles. Rather longer ago, cigarettes were marketed as improving your health.
Today a pragmatic approach suggests we should avoid carbonated soft drinks companies as their products may have played a major role in the rise in diabetes and obesity in developed markets such as the US and Mexico. As we saw with the tobacco industry, what begins with an ethical decision not to invest, then pays off as social liabilities are made real by massive fines which hit share prices. Again, for us, these factors have always been part of equity selection.
Governance may be the area where we have the strongest views. Whenever we buy an equity, we are putting other people’s money at risk (and our own as investors in our funds). Having strong title to that investment is critical, in bad times as well as good. We have long memories: 15 years ago investors in the Manezhnaya Square shopping centre in Moscow found their shareholdings had been crossed out and made over to the wife of the mayor of Moscow. Court action proved impractical. One should not forget this sort of behaviour. Even if you did manage to sell a Malaysian share in the Tiger crisis of 1998, their government suspended forex, so you could not get the cash out of the country. Again, one should not forget. Both are examples of state or quasi-state action which is close to theft.
Alongside property rights, which are principally an issue in emerging markets, we expect shareholder rights to be respected and understood by management teams. Here, we find the absence of shareholder democracy in US technology companies more reprehensible than Japanese board practice. However, as long as these issues do not significantly affect shareholder returns, they may not stop us investing in a company. In emerging markets we keep an eye on related party transactions as private and public company interests can be in conflict.
Lastly, we tend to be active holders of shares – active in encouraging good management to get on with their jobs and invest for the future. Again, this seems often to put us at loggerheads with ‘activist’ investors, asking for reduced investment and higher short-term payouts. Why own equity in a company if you do not think it has good prospects; and, if it does, why argue against internal investment?
Sustainable investing and sustainable returns
We build portfolios around areas of sustainable global growth, so sustainability has always been part of our investment process. When given a list of companies that Nordic investors filter as unacceptable, we were not surprised to find that we had only ever held one of a few hundred stocks. More recently, we were pleased to find our fund rated by Morningstar in the top five funds for a low-carbon future.
We have never believed that sustainable investing principles stand in the way of excellent investment returns, nor have we felt that they remove the need to pick profitable businesses in growing industries. Ultimately we are capitalists and see market capitalism as a great force for good in the world – albeit with social and environmental costs which need to be assessed and monitored. This leads to a balance in which we can continue to produce strong real investment returns on a truly sustainable basis.
Simon Edelsten is manager of the Artemis Global Select Fund
Charity Finance wishes to thank Artemis for its support with this article