Charles Stanley is one of the larger UK wealth managers with almost exclusively UK clients, including high net worth individuals and institutional investors such as charities. Chief executive Paul Abberley took the helm in 2014, building on the success of the firm with a strategic review and a focus on bespoke investment portfolios.

As Environmental, Social and Governance (ESG) factors have come more to the forefront over recent years, this emphasis on detailed conversations around tailored investments has stood the nearly 250-year-old firm in good stead.

“Our bespoking of client investment portfolios has always included a discussion around any ethical questions they may have,” says Abberley. “This is not new for us. We can build those factors into the investment process. The ability and willingness to incorporate ESG screening predates the more recent growth in interest in this type of investment.”

The veteran asset manager says that the interest in responsible investing has been driven by institutional and professional intermediaries who have been spurred into action by social and regulatory pressures.

He says: “There has always been selective negative screening, especially by charities, but over recent years there has been an increased interest in ensuring the overall portfolio is invested responsibly.”

ESG risk factors

This shift presents its own peculiar set of challenges. “Although ESG risk factors are things that analysts should have always been looking at, we can question how thoroughly the participants in capital markets have really been analysing these risks,” says Abberley.

“Now that the emphasis has shifted, analysts need to dedicate more time to ESG factors and this can be very labour intensive. Analysis of a balance sheet you can do using Excel and a lot of the data is already public but, when it comes to ESG analysis, it is qualitative and much of the information is not readily available.”

The subjective nature of the analysis is a real problem, he says. “If you are simply interested in the profitability of a company, that is pretty objective but, when you are looking at governance for example, it can be difficult to measure.” It is also not generally transferable from company to company. “You cannot read across the numbers as the reporting formats are still in their infancy. Comparing the data from one company with another’s is fraught with difficulties.”

One of the issues, says Abberley, is that there still remains huge inconsistencies with the ratings provided by independent agencies. “ESG assessments of a company can vary greatly depending on which provider you use.”

This presents a challenge for charities that are seeking a more systematic approach, such as a numerical ESG scale, which can be applied to a company’s profile.

“Charities obviously are keen to avoid the ESG equivalent of greenwashing but, if the underlying data is unreliable and lacks precision, it is hard to know in all good conscience whether your methods of measuring are truly robust. There is a recognition in the industry that something needs to be done about this but we are some way from coming up with a system or a set of guidelines that can address all the issues around subjectivity.”

Rules of the game

Despite such challenges, responsible investing is here to stay. “Responsible investing will become a very normal and natural part of the capital markets,” says Abberley. “Regulations are changing around private client investing and, soon, conversations around ESG requirements will be mandatory. As a result, capital flow will be increasingly invested with ESG, much more than even 10 years ago. The direction of travel is very positive in this respect.”

This trend will benefit those institutional investors that are ahead of the curve when it comes to responsible investment.

“Capitalism has always operated within the rules and regulations of the market. But nowadays, there is less tolerance, socially and politically, of companies that behave badly,” says Abberley. “If regulations are being set to benefit those companies that are operating responsibly, it is reasonable to assume that return on capital at the margins will continue to improve, and that will be at the expense of companies or industries that are considered less socially responsible. The rules of the game are changing.”  

Paul Abberley, Chief executive officer – Charles Stanley

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