Controversially, this could be true! In a recent podcast, Peter Harrison, CEO at Schroders, stated that “ESG won’t exist in five years’ time – it’s what people will be expected to do and the debate will move onto impact.”
The industry’s been on a journey since the early launches of ‘ethical funds’ which were based largely on exclusions. Environmental, Social and Governance (ESG) is more than just ‘excluding and avoiding’. It’s also about including and about paying attention to how non-financial factors such as Environmental, Social and Governance considerations may impact an investment’s ability to generate long-term returns.
These ESG principles should be embedded into every single investment process and that means for fund managers and investment advisers alike.
61% of people believe that individual investors can significantly contribute to a more sustainable world by choosing sustainable investment products – this doesn’t just feel like a young person’s game.
With this rise in consumer awareness has also come an exponential increase in regulatory scrutiny, and arguably one of the most important regulations for advisers is the proposed amendment to MiFID II. This will require an adviser to discuss sustainability preferences with all clients and incorporate this within their suitability assessments. A discussion about ESG and sustainability is no longer a tick-box exercise but is now a formal requirement where the discussion will need to be evidenced for clients of any age.
Global warming, plastic pollution and causes such as extinction rebellion are high-profile and tangible but social changes and shifting demographics are also reshaping our planet, leading investors to question the impact of their investments.
The Covid-19 pandemic has brought the ‘S’ and the ‘G’ sharply into focus. How have companies treated staff? Have they protected their supply chain? Are they a diverse (of thought, ethnicity, gender etc.) business? Is the business resilient? These are all valid questions.
A recent survey indicated that as a result of the global pandemic, 68% of advisers would pay more attention to the ESG risks associated with investments and 88% agreed that the crisis reinforced the importance of stewardship and using an asset manager that actively engages with company management on these issues.
Engagement and dialogue between shareholders and boards must be visible. These discussions should ensure that a company’s long-term strategy and day-to day management is effective and aligned with the shareholders’ interests.
As an example, last year at Schroders we undertook more than 1,750 engagements with companies, of which 77% resulted in some kind of change.
Since ESG is still relatively new, the challenge is not complexity but familiarity and the consistent use of terms. We refer to the ‘spectrum of sustainability’ as a way of helping clients to understand where ESG fits in.
Integrated – These are funds where ESG is integrated into the investment process. ESG risks are considered alongside traditional financial metrics when selecting investments, which we believe will become standard practice across the industry.
Sustainable – These strategies focus on companies that are ‘best-in-class’ in terms of their approach to ESG practices, with an emphasis on creating positive outcomes for all stakeholders and avoiding controversies.
Ethical Screening –This looks to avoid companies with material dealings in traditional ‘sin stocks’
Thematic – These strategies pursue a certain environmental or social theme such as environmental efficiency or health and wellbeing. This can be based on a desire to contribute towards advancing these solutions as well as participating in the financial opportunity as demands grow for these products and services.
Impact – Investments made with the primary goal of achieving specific, measurable, positive social benefits while also delivering a financial return. An example of impact investing is investing in green bonds where the proceeds go towards funding a project to mitigate climate change.
The ‘spectrum’ can support a client conversation about how they want to invest and where a potential solution might fit.
Whilst performance benefits are easy to measure, clients are demanding quite rightly that they understand how their money is making a difference. We are now seeing the emergence of good quality client reporting to support this. The example below3 indicates how £1 million invested can make a difference on both ‘people’ and ‘planet’ when investing in a specific portfolio. Whilst still in development, we believe that reporting like this can help clients to understand how their investments are being put to good use in addition to offering risk adjusted returns.
For more insights articles such as this, please visit our insights page
 Schroders Global Investor Survey 2019
 Schroders Covid-19 Adviser survey, 2020
About the author
Gillian Hepburn, UK Intermediary Solutions Director, Schroders
Gillian has over 30 years’ experience in financial services. Prior to joining Schroders, she had an extensive career at Standard Life followed by consultancy positions with a range of platform providers, asset managers and financial advisers. She also founded DISCUS, a business which provided research, insight and educational content for financial advisers about the outsourced investment market and spent time as Head of Strategic Partnerships at the Embark Group.
Gillian is responsible for outsourced investment solutions for the UK Intermediary market including model portfolios on platforms and multi-asset funds.
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