Q&A: An expert view on ESG

Jessica Ground

Jessica Ground

Global Head of Stewardship

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The 2016 Schroders Global Investor has revealed attitudes to the consideration of environmental, social and governance (ESG) issues when making investment decisions, covering from 20,000 investors in 28 countries.

Jessica Ground, Head of Stewardship at Schroders, tackles some of the key issues.

The survey makes it clear that there is a lot of interest in sustainable investing, does this tally with what you are seeing? What has Schroders been doing?

It is entirely understandable. The world is changing faster than ever. Environmental pressures are more acute and social pressures are changing rapidly.

Our clients realise this and are asking how we are responding as fund managers. Out focus at Schroders has always been in integrating ESG considerations into our investment processes.

In our view, unless companies respond to these trends, build engaging relationships with stakeholders and operate in a sustainable way they will struggle to maintain a competitive and profitable business.

We as asset managers can also play a role through our stewardship activities in encouraging improvement in these areas.

The result has been that an industry, “sustainable” or “responsible” investing as it is commonly called, has moved from a niche sideline to become front and centre. Over 90 of the world’s 100 largest investment managers have committed to incorporating environmental, social and governance (ESG) considerations into investment decisions, ownership and reporting by becoming signatories to the Principles of Responsible Investment (PRI), a UN-backed initiative.

We have been involved in the industry throughout. We believe that fund managers, including ourselves, must now be clear about how a commitment to ESG translates into investment decisions and show how as investors, we ensure companies are actively responding to changes around them.

Does this focus on sustainable investment mean that the industry has been operating in an unsustainable way prior to this?

Sustainability has always been there – and has been a key part of the process of making the right investment decisions.

It has had many names - ESG, sustainable investing, responsible investing or Socially Responsible Investing (‘SRI’). All essentially follow a method of investing that looks to understand the quality, growth and sustainability of a business.

It strikes us as obvious that building strong relationships with the stakeholders – anyone affected by a company’s activities - and adapting to the changing pressures they exert, lies at the heart of long-term competitive advantage and sustainability.

Schroders has always been a long-term investor. Our analysts instinctively know that to understand a company’s prospects as an investment, they must evaluate how it engages with the outside world - rather than focusing on short-term quarterly results.

Thinking constructively about these questions provides a tremendous contribution to our ability to create sustainable, long-term returns for our clients.

The study also found that investors globally (82%), on average, were willing to give sustainable investments more time to succeed. Do they really need to wait longer for better returns?

Our aim is to ensure companies are responding to a fast-changing world and looking far into the future to address some major issues, like demographics and climate change.

Some of the factors that demonstrate a company’s resilience and outlook can play out over years. It requires patience. At the same time we think no company should be complacent and caught unawares.

We are convinced that taking account of world-changing trends, such as climate change, does not have to mean compromising shorter term performance.

In fact, we are not going to be able to help our clients meet their goals, which are typically far longer than investment cycles, unless we establish long-term views of these trends.

We are stewards of our clients’ capital - being the best owners we can over longer holding periods should improve outcomes and returns for clients.

The study showed three-quarters of consumers would “consider” moving money if a company was in the news for the wrong reasons. Do investors ‘have the power’ to steer capital and promote more sustainable business models?

Global stock markets account for approximately a quarter of the world’s financial assets.

Adding the value of corporate debt brings the total value of securities issued by private companies to around one-third of that total, roughly similar to the annual output of the world economy.

They are extremely powerful in their role of allocating capital and can exert influence as a result.

We are about to see a momentous wealth transfer to the millennial generation who will live longer than any before and, given the rise of compulsory pension savings, will have more control of these assets than any previous generation. Importantly, this generation is showing every sign of valuing responsibility and sustainability as highly as investment returns.

Investors can and will drive listed companies to look beyond financial concerns and to play a role in creating a more sustainable world, to look at how they treat their employees, their customers, and how they consume world resources. Pressure for this to happen only looks set to increase.

Are investment managers owners or renters of companies? How is Schroders a catalyst for change in the companies in which it invests in on behalf of clients?

We’ve always seen as ourselves as owners, not renters of the companies we invest in. That means we’re part of a two-way conversation, influencing how they grow and how they tackle challenges and opportunities.

Issues such as climate change, sugar consumption, water scarcity can all present material risks and opportunities for a business.

We are convinced active engaged investment, as asset owners, will deliver better outcomes for the world and for investors.

Can you give us an example?

Investors are made painfully aware when well-known consumer goods groups fail to live up to high ethical standards. Brands such as Nike, Adidas and Primark have been tarnished by alleged involvement in poor labour practices in developing countries.

Such issues can have a direct effect on revenue, not only in terms of consumer boycotts but also as a result of strikes affecting their supply chains.

Transparency and social media means that breaches of standards can become known overnight. These issues are even more important in the luxury sectors where consumers expect more.

We have engaged with a luxury retailer of women’s handbags to provide details of its supply chain audits and environmental impact of its suppliers.

We’ve been pleased to see progress has been made upon review; but there is still work to be done. Management are now aware of ESG risks and their importance to a company whose brand is its main asset.

The study found a potential misunderstanding between investors who want to take a more sustainable approach to their investments and financial advisers who are reluctant to raise the issue. Why is this?

It probably doesn’t help that there’s no single definition for these issues and also because responsible investing means different things to different people. But these are important discussions to have with clients.

It is no longer just a case of working out an investor’s goals and attitude to risk, an adviser must also understand the investor’s attitude to the world and how they might want their money to improve it.

Looking forward, financial advisers will be asking managers how portfolios are tilted to take account of shifting trends and how they are building tools to better support investment decisions and engaging companies to promote more transparent and forward-thinking responses.

What are three questions advisers could ask asset managers on their approach to understanding the sustainability of a business?

  1. How does sustainability fit within your investment philosophy?
  2. What knowledge, skills and tools do you have to better support investment decisions?
  3. What are the main medium and long term risks and opportunities you believe industries/companies will need to respond to?

Do you have any final thoughts on what future trends investors should be thinking about?

Effective corporate strategy is becoming less about forecasting the future and plotting a course towards it, and more about building the organisational resilience to adapt to unexpected change. Good investment decisions in response to this rely on analysis and analysis needs data.

Rigorous, relevant and consistent data at company and asset levels is critical to our ability to define, understand and quantify the scale of social and environmental trends and how best to navigate it.

We are convinced new tools are needed. Schroders is focusing efforts on building models that reflect companies’ abilities to adapt to the changing social and environmental trends they face.

This means analysing industries and the ways social trends impact business models, competitiveness and profitability. It means focusing on how companies are run, rather than just on how much money they make.

Well managed companies, which score well on all of these measures, should have a sustainable competitive advantage and make better investments over the long term.