Stranger Things: Value and Sustainability
If you fell out of a time machine into a field in the UK this morning and the three things you got told were that inflation was running at c.9% (Source: ONS, Consumer Price Index, as at May 2022), there were widespread, collaborative, union strikes and that Kate Bush was sitting at No.1 in the charts, you could be forgiven for thinking you’d landed in 1978.
Despite being over four decades ago, there are a number of worrying parallels in the market conditions that investors face today with those back in the 1970s; my colleague Nick Paisner has actually written a piece on the 1970s here. Volatile investment markets, commodity price spikes, high levels of inflation, there are very difficult decisions ahead for policy makers. Another thing as a Value team we could shamelessly point out is that back in the 1970s you would also find the MSCI World Value Index outperforming its MSCI World Growth counterpart for a number of the calendar years, as it has been year to date in 2022. However, given the last decade for Value investors, it’s probably best not to cherry-pick performance!
You probably wouldn’t have found many Bitcoin or SPAC (Special Purpose Acquisition Company)
advocates back in 1978. I’d also be pretty confident in saying that whilst some fund managers back then may have considered elements of what covers the broader term of ‘ESG’, particularly considerations from a governance perspective, there was likely far less of an emphasis and focus placed on it by both investors and the wider market.
In the 40 years that have followed since the 70s and over the last decade especially, the interest, attention and detail required from clients when it comes to how we think about and incorporate ESG into investment decisions, has grown exponentially. This has occurred at a market wide level, particularly across equities. Within equities I think it’s fair to say there have been very few styles of investing open to more scrutiny when it comes to ESG than Value investing.
By its very nature, Value investing can and will make you fish in waters, where you may find companies who have been involved in controversy. Whether it be a bank involved in fraud, a retailer who paid staff less than minimum wage, or an oil & gas company with poor safety protocols involved in a spill. There is a perception that shares can often be cheap because companies have historically done something bad (a controversy) or are having a very net negative effect today on the environment and society due to the direct/indirect effects of the products and services they produce. However, the shares Value investors look at, more often than not, are cheap due to a combination of very different reasons. We do come across companies that have been involved in controversy on our screen, but we think it’s important to point out that the instances of these particular companies are much more the exception, rather than the rule.
Running up that hill
We appreciate the difficulty of the task that building well style diversified, sustainable portfolios poses for our clients due to the perceived trade-off between investing for Value exposure and in best-in-class sustainable companies. It could be compared to being about as easy as ‘Running up that Hill’ I’m sure Kate Bush would tell you. However, in the Global Value team we believe we have helped alleviate this headache with the launch of our sustainable value strategies which seek to answer (amongst others) three of our clients’ most pertinent questions in this area:
1) Can Value and sustainability actually coexist?
One of the biggest questions we receive is that due to the nature of a Value investor’s universe (as touched on above) it must be unlikely that a sustainable Value fund could provide the same level of return as a non-sustainable fund. This is down to the perceived material impact that exclusions of things like tobacco, gambling, oil & gas, utilities and alcohol may have on our universe/opportunity set and so ultimately returns. The chart below helps show that the impact of certain ESG exclusions is very modest on performance.
2) Will exclusions mean that I won’t be able to receive the same degree of deep Value exposure as seen in your other ESG unconstrained products from your sustainable Value strategy?
Actually you can. Morningstar analysis shows that the Value score of one of our sustainable global strategies is just as prominent as that of our other ESG unconstrained strategies.
3) How can I trust my clients’ money will be invested and remain invested in best in class sustainable companies?
Within our sustainable strategies we only invest in ESG leaders and follow a rigorous analytical process to screening companies from a sustainability standpoint to ensure each company is an ESG leader. All companies must meet at least the following criteria to be eligible for inclusion in our sustainable strategies. These are:
- A company must have an MSCI ESG rating of A or above
- It must have a net positive impact on society. We use our proprietary quantitative tool, SustainEx, to inform our decision. SustainEx assigns a dollar cost to all the positive and negative externalities a company produces and sums them to give a net annualised Social Value.
- It must be considered an ESG leader after we as the Global Value Team have conducted our own independent analysis.
We believe that if a company is scored by an unbiased 3rd party information provider, an independent quantitative tool and then surpasses our own ESG analysis, we can say with high conviction that the companies we are investing in are truly best in class from an ESG perspective. If for whatever reason in future a company no longer meets one of the criteria, this is a sell trigger for the fund.
Investment markets don’t get easier and nor do the jobs of our investment team or our clients. Nonetheless, we hope that by combining our passion, skill and experience in Value investing with a rigorous approach to sustainability, we can help provide you with the investment tools you need to build well rounded sustainable portfolios.
Value and sustainability: stranger things have existed.
For more information on our strategies please visit our fund centre here.
Schroders uses SustainEx™ to estimate the net impact of an investment portfolio having regard to certain sustainability measures in comparison to a product’s benchmark where relevant. It does this using third party data as well as Schroders own estimates and assumptions and the outcome may differ from other sustainability tools and measures.
Investment Product Analyst
I joined Schroders in 2018. I initially worked in institutional sales with global insurance clients and then moved into UK Sales focusing on wealth managers and intermediaries. I joined the Value team in 2022 as an Investment Product Analyst. Prior to joining Schroders I interned at EY within the Corporate Restructuring team. I have passed level 1 and 2 of CFA and am studying towards level 3. I hold a BSc in Economics & Finance from the University of Leeds.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German, Tom Biddle and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.
This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.