Amy Lazenby: Socially responsible investment portfolios

07 Mar 2019 Expert insight

Amy Lazenby explains how to create socially responsible investment portfolios.

Increasingly, charities want their investments to help build a more sustainable future, as well as generate a financial return, which is why we have introduced a range of socially responsible investment (SRI) portfolios. Continuing in-depth research and analysis shows that investing in this way can improve the profitability of a portfolio. SRI portfolios aim to maximise long-term profits by investing in global businesses with real concern and respect for wider social, environmental and economic issues.

Doing good, delivering profit

Research that we carried out while creating our SRI portfolios made it clear that companies which endorse the values that are important to charities seem to outperform the broader market – and experience lower levels of volatility. In other words, doing good with investments can deliver better returns too.

There is significant evidence that the environmental, social and governance (ESG) factors in a company being considered as an investment option are important indicators of risk. Investors who consider these factors in the selection of investments have generally seen better risk-adjusted returns than the broader market.

We invest in a carefully selected group of sustainable businesses that are aligned with the United Nations sustainable development goals. All the investments are made with a view to making a profitable return but they are also all investments which have a net positive impact, which we measure and relay to clients in a meaningful way.

Client money is invested through a combination of direct shares and third party funds, constantly reviewed, assessed and approved by a team of dedicated SRI specialists. The portfolios are actively managed within a framework of institutional discipline and a collegiate culture.

Our SRI portfolios are predicated on a straightforward, practical investment philosophy: to maximise long-term returns while contributing positively to wider social, environmental and economic issues, all within pre-agreed investment risk constraints.

Detailed and comprehensive research, both internal and independent, has made it very clear that ESG metrics are powerful indicators of the future share price performance of a company – and of its potential volatility. By analysing this data we are able to identify exciting investment opportunities both in terms of financial and social returns.

The United Nations sustainable development goals promote prosperity and sustainability. Many companies have developed frameworks from these goals, and are growing their profits in alignment with them. Evidence shows that companies that endorse these values will outperform the broader market with lower levels of volatility.

Reflecting the UN goals in portfolios

When considering companies for inclusion in a SRI portfolio, we identify which of the following impact and investment themes they best reflect:

  • Social empowerment
  • Environmental protection
  • Health
  • Economic advancement

Having grouped potential companies into their themes, we apply the following three essential criteria when deciding whether they should then be included in SRI portfolios:

1. Ethical - sustainability

We avoid businesses that do not align with the UN global goals. We believe such businesses are less sustainable in the long run.

2. Environmental, social and governance (ESG) - safety

We positively screen for companies that embed ESG factors into their corporate culture. Rigorous ESG analysis is about how a business conducts itself and manages risks with stakeholders.

3. Impact - growth

We identify companies that are advancing the UN global goals. This leads to investment in exciting, high-growth trends based on innovation and offering excellent return opportunities.

Tailoring a portfolio to reflect your values

These three building blocks enable us to create bespoke portfolios that reflect client values and passions. When clients are interested in focusing their investments on a particular impact theme, we can create a portfolio to achieve that goal.

Monitoring and maintaining ethical behaviour

Looking for ethical investments

Our interpretation of ethical focuses on sustainable investments that are aligned with the UN global goals. We do not just mechanically screen companies based on industry exposure, but take a more thoughtful, considered approach.

Looking for commitment to ESG

This is not about what a company does – it’s about how it behaves. We analyse whether ESG factors are incorporated into the company’s corporate culture. Our ESG analysis looks directly at how a business conducts itself in every aspect of its activities. After all, evidence shows that businesses which adopt ESG principles are usually safer long-term investments.

Our analyst team considers ESG factors in its assessment of each company as a key risk metric. For a company to be part of a SRI portfolio it must either show an improving ESG trend – or rank highly in comparison to its global sector peers. In addition, to ensure that the process is truly robust, we have partnered with an external provider, MSCI ESG, that gives us comprehensive commentary on ESG issues and detailed impact analysis.

Looking for impact

We define impact investments as those displaying a positive social, environmental, health or economic impact and having the ability to deliver a positive financial return.

We strongly believe that companies need to innovate if they are to be sustainable. Impact investments are typically growth companies that are innovating to find solutions to global problems, as identified by the UN global goals.

We have developed our own proprietary impact measurement model, which measures the dispersion of impact across portfolios. This means that clients can see the positive social, environmental and economic impact they are having with their investments, alongside financial performance. It isn’t just about examining what a company does, but going deeper and looking at how a company behaves.

Amy Lazenby is an investment director at Close Brothers

Charity Finance wishes to thank Close Brothers for its support with this article

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