Understanding the difference between sustainable, ethical and ESG investing is vital for the advice and fund management industries, according to Ayres Punchard managing director Chris Welsford.
Here, he talks to ESG Clarity about using the UN Global Compact, client appetite for ethical investing and how fund managers can engage better with companies.
You’ve been investing sustainably since you launched, how has that evolved?
In 1995 when we started the company, we thought it was important people had the choice to invest in a socially responsible way – in the old ‘SRI’ funds. Ethical investing and socially responsible investing were more aligned then.
It wasn’t until about 2009 that we could see there were some characteristics around what we were still calling socially responsible investing that could potentially mitigate risk. So we started investigating those. Then between 2009 and 2014 we made sort of ‘blended’ portfolios of conventional and socially responsible, but by 2014 it was clear the best part of these were the more sustainable elements.
Then we developed pure, sustainable investment portfolios. These are bespoke portfolios for clients on an advisory basis. And then we decided that we should seek help from a discretionary manager to get them to help implement our strategy on a discretionary basis.
We teamed up with Peregrine & Black [and now run the Key to the Future model portfolios, which have five risk models]. [Head of responsible investment solutions] Chris Redmond and I worked really close together. I carry out the research into the funds we wish to include in the portfolio, and then if they’ve passed our sustainability tests [they go] to Chris to process his due diligence on. If he’s happy with it, it goes into the portfolio.
Roughly 17% of our clients are currently invested in bespoke Key to the Future advisory portfolios and 83% are in the discretionary MPS version. We expect this to change very soon to 98% as we are in the process of migrating most clients to the MPS.
Clients may be in bespoke models because they have ethical requirements – this is where the industry has gone horribly wrong, we’ve conflated ethical and sustainable and we’re heading into some really bad places now.
How so?
ESG is an analytical tool – it’s going to tell you something about the company, but you then have to make a decision about what it’s told you. An oil and gas portfolio can still be ESG analysed.
If we misunderstand, mislabel and get this wrong, the industry is doing a massive disservice.
See also: – FCA delays ESG labelling consultation
Is there enough data to be able to look into clients’ specific ethical concerns, as opposed to sustainability or ESG analysis?
Absolutely. The data that’s available is just out there on the web. Our research project will be looking at all 400+ companies that are in the portfolio. We’re looking for those companies that score badly in terms of the UN Global Compact. The Global Compact gives us a better steer on the characteristics of companies [than the Sustainable Development Goals] based on their environmental profile and their human rights profile, which covers all sorts of things around labour abuse and anti-corruption.
There are four main headings of the Global Compact, which are then split into 10 subheadings. So we look at those and screen companies based on those criteria. The ones we think may be really falling foul of those, we’ll carry out a deep dive. We’ve taken a company recently, Centene, back to the fund manager that held the stock and we’re in the middle of a big engagement process with them.
How robust do you find the asset managers’ engagement processes once you go back to them with things like this?
It varies – they do genuinely believe they are engaging properly with companies so if we point out inadequacies they are a little crestfallen. The better ones will realise they could have asked a better question. Often they will say they are “reassured” by a company’s response, but that doesn’t mean the company had a good response.
You have questions about ethical values on your client fact-find – are you finding more clients engage with this part?
Yes, which is great, but we’re also seeing more people tick [the] box [to say they are not interested in ethical investing] and just want advice on the best way to make money. There are still a lot of people who don’t see their ethical values need to be reflected in their portfolio, any more than they see they should be reflected in their purchasing choices when they go to the shops. They just want to get the cheapest bread they can buy, the cheapest pair of shorts or the cheapest sandals. Even when they’re quite well off, they’re still going for the bargains. That’s hard to change.
Where do you see gaps in the market for sustainable or ethical funds?
Potentially a focus on IPOs and AIM markets, and even private equity, because there is an argument as to whether secondary market investment will give us the impact we’re looking for.
What would you see as a red flag when you’re researching a fund?
If sustainable funds are about anything at all, they should really be about stakeholder capitalism. Because if they’re not, they’re not looking at all the different stakeholders, but only if they’re only focused on shareholder value maximisation, then they missed the point completely.
| Preferred DFMs for ethical investing | Peregrine & Black |
| Example sustainable portfolio (Key to the Future 3) | Cash: 0.5% Fixed income: 30% Equity: 66% Property: 3.5% |
| Percentage of assets under advice that are sustainable | 100% sustainable (with 17% in bespoke portfolios that consider ethical investing) |
