'Just because you are investing ethically, it doesn't mean you are investing sustainably'

03 Dec 2018 In-depth

What, then, does sustainable investment look like? Charity Finance and Newton Investment Management convened a panel of interested parties and Ian Allsop captured their thinking.

Sustainable investment is an increasingly-heard term. But what is (and isn’t) it? Does it mean different things to different people and organisations?

This is a question that was posed by Newton Investment Management in its recent fifth charity investment survey, Hold on Tight. Jeremy Wells, client director for charities and specialist institutions at Newton, and author of the report, says that while sustainable investment isn’t uncharted territory, it is an open landscape featuring many interpretations.

“The survey produced a range of answers to the question of what sustainable investment is. The most popular was investing in companies contributing to sustainable development goals. Other recurring responses included having a low carbon portfolio, climate change investing, having ethical restrictions, and divesting from companies that breach norms and standards or do not respond well to engagement. Impact investing was much lower down.

“It is a wide range, but that is OK. It is interesting that people have different takes as this allows for a range of offerings to cater for different appetites.”

Andy Nolan, director of estates (sustainability) at the University of Nottingham, says that the higher education sector is largely still in the early stages of understanding what sustainable investment should look like. “We are trying to understand what the opportunities are to make sensible investment decisions that meet the needs of our ‘customers’. We face them every day – 40,000 students all actively involved in what the university does.”

Nolan is alluding to the fact that the university divested from fossil fuels as a direct result of a student campaign. He says he recognises that student lobby groups can be agents of change.

“A small number of stakeholders can be effective at amplifying their voice, and taking the silent majority with them. It has woken us all [in the higher education sector] up, and doing the right thing is now central in our decision-making. However, we also have the added complication of working in partnership with fossil fuel companies on research programmes, which can create a moral dilemma.”

He adds: “Our response so far has been largely around ethical restrictions, rather than strategically asking how we can have the biggest impact. While we are keen to ensure our reputation, we know that both are important – it is not just about doing less bad but doing more good.”

Jackie Turpin is head of finance at the Joseph Rowntree Charitable Trust, which has long had ethical and responsible investment policies. “For the last six years we have invested solely through sustainable funds,” she says. “But what is really meant by sustainable investment? There is a lot of greenwash out there, and a lot of misconception about what it means to invest sustainably.

Just because you are investing ethically or responsibly, it doesn’t mean that you are investing sustainably. “Investing sustainably is about looking to the future,” she continues. “There are two aspects to this. First, you need to look at how a company manages its own affairs and how it looks after its stakeholders. Does it treat staff the right way?

Does it treat its customers fairly? Is it cognisant of the community in which it operates? And second, you need to ask yourself, ‘Is this a company which will be supplying the goods and services of the future and shaping society and the environment in a positive way?’ “If you can answer these sorts of questions in the affirmative, then all things being equal this is the type of company which you might reasonably expect to survive over time and deliver long-term returns.”

Turpin sees this as a win-win situation – investing in companies which we can be proud of while not sacrificing performance. “We have seen a positive impact on returns, and have significantly outperformed our benchmark over the last six years. In investment terms this isn’t a long time period over which to assess performance but nevertheless it is encouraging.”

Rob Stewart, head of responsible and charity investment at Newton, agrees that a sustainable approach can benefit returns. “We want to apply environmental, social and governance (ESG) criteria to all portfolios as there is information there that can help us as investors. I can’t understand why you wouldn’t think it important to look at how a company is managed.”

Access – The Foundation for Social Investment has a mandate to invest its endowment via a total impact approach, which means it seeks positive social outcomes through its investments rather than just through its charitable spending. Director of finance and operations Janie Oliver says she was struck by one particular finding in Newton’s survey: “71 per cent of charities say ESG [economic, social and corporate governance] factors are important. Why is this not 100? Why is there a resistance? As a minimum, shouldn’t we all be thinking about active ESG to add value? I can’t see a lot of downside.”

Another statistic in the report is that 59 per cent of the respondents think sustainable investment has a detrimental impact on returns. Oliver takes issue with this too. “Research has shown a positive return from sustainable investment, so are people actually maximising returns if they don’t consider ESG factors? We need to understand these misconceptions. Why do they exist? What is our role and responsibility to educate?”

Wells considers it noteworthy that charities’ attitudes are still largely about excluding things one way or another. “It is often still about avoiding something bad rather than reaching for something good. But there is something really positive you can bring through sustainable strategies by identifying risks around future sustainability across a range of issues. And not just, for example, climate change; it is also about sustainable business practices, diversity, labour practices, and seeking companies that are doing the right thing, because that is a marker of future success.”

Turpin observes that you could have a tobacco company which meets certain responsible investment criteria, for example paying the Living Wage Foundation’s living wage, but that doesn’t mean it is a sustainable investment. “Trustees have to think very carefully about whether they are fulfilling their fiduciary duties when investing in companies that clearly don’t have a long-term future and are actually delivering societal and environmental harm.”

Stewart points out that Newton launched sustainable funds because it agrees with that, but says not all clients are interested. “The argument is that if a lot of people sell something that is ‘not good’, the price drops to the point where you feel you should own it and then it will recover. The feeling is that if you reduce your investment universe you are cutting out opportunities.

“However, sustainable investment allows us to do something we want to do, and by generating good returns, it might encourage others to follow.”

Engagement

Belsom is keen to discuss the role of investor engagement with companies in improving behaviour, pointing out the lack of clarity about how it works. “There is a lot of talk about engagement but much is based around anecdotes. It can be hard to differentiate between what is good and bad engagement.

“There is a real need for asset managers in the charity sector to have greater transparency about escalation. What do you do if after two years of engagement there has still been no action? This is a missing piece in the industry’s response to advocacy, and clients need to push the industry to report on these issues.”

The charity sector certainly believes its engagement is making a difference, says Wells. “On the whole charities think they have been successful. Four fifths think that if you engage with a company on a particular behaviour, that behaviour will be changed. And where companies are defined as poor, the right thing to do, by a ratio of three to one, is to engage rather than divest.

Turpin argues that sometimes charities forget that they are the owners of the companies in which they invest. “As shareholders we are responsible for the behaviour of these companies and need to recognise that what they do reflects on us and our reputations. It is incumbent upon trustees and charity staff to educate themselves about what it means to be a responsible asset owner.

“Size doesn’t have to be a constraint – even if you cannot afford to retain an investment adviser, there are a number of networks including the Church Investors Group and the Charities Responsible Investment Network which can help educate and provide collaborative strength. There is no excuse to simply be passive.”

Education

Nolan emphasises the importance of education for investors so that they can hold their managers to account. “We have established governance structures in the HE sector but this isn’t our core business and our challenge has to be to become a better informed client. But are we demanding enough as a client? Educating trustees is invaluable.”

Having well-informed, demanding clients can be a challenge but is what drives improvement, says Stewart. “On a relative basis, charities have a limited amount of money, but they do have an influence on how companies think about things, which is worthwhile. We respond to pressure, and notice good clients who ask for difficult things. Asset managers have to have the mentality that we need to constantly be improving and doing different things, such as responding to the recent IPPC climate change report.”

It is music to Oliver’s ears to hear that “difficult” clients are good at driving change.

“We get approached by other foundations asking how they can do more with their endowment [in terms of sustainability], and we tell them to have a conversation with their asset manager. They then say ‘we have but the manager says it is really difficult’. The balance of power is skewed. But if you challenge them, it is possible to create change.” For Belsom it isn’t about being difficult, but being “an active client on a range of issues and making sure your principles can overlap on both the grantmaking side and investment side.”

Wells argues that while any individual charity, or university, only owns a small part of a company, there are two ways to think about this. “One is a message of despair – we are too small, so why try? But actually the charity sector and organisations with a name can punch well above their weight. The divestment debate being driven by churches and universities is a good example of this. Running with the tide of concern over climate change helps, but you have a voice that is proportionately louder than your overall economic market share and should use it in a targeted way.”

Turpin muses over the Shakespeare quote “though she be but little, she is fierce”. She says: “When we divested we didn’t expect to affect the share price of the oil and gas companies. But it did send out a powerful message about our expectations of the future and the development of renewables.

“We also see a huge dividend from working in partnership with our fund managers – the areas in which we work as charities afford us important insights into the way we want to see society and the environment develop, and we can assist our managers by sharing our learning with them.”

Opportunities

Stewart states that the sustainability agenda offers tremendous opportunity. “There are a load of problems that need solving in the world that are fantastic investment opportunities. If we are to tackle the issues we need to tackle, there is a massive investment opportunity on an Industrial Revolution scale.”

Wells is particularly optimistic about the potential of technology and innovation to solve global problems. “Our ability as a species to adapt and replace ways of doing things with radically different ones is fantastic.”

Turpin believes that investment managers must be asking technology companies about how they are handling the moral boundaries around their activities. “If tech companies don’t incorporate moral considerations as a routine part of their business, we could pretty soon be staring at a world that we don’t like the look of.”

Stewart says that morality is a big part of investment and business. “If you have immoral people running a business or moral people asking the wrong questions, there is a problem. I think most technology companies are not as evil as they being made out to be – they are just young and growing in ways they never expected. But we do need to challenge them.”

In conclusion, Wells says the debates around sustainability aren’t just for the charity sector, but for everyone. “It is at an early stage, hence why definitions are relatively flexible. However, I truly believe that this approach is the beginning of a journey that will underpin everything we do.”

With thanks to Newton Investment Management for their support with this article

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