Liontrust’s Michaelis: ‘Performance is critical to success of sustainable investment’

Square Mile conference delegates discuss appealing ESG to clients, simplifying sustainability and upcoming regulation


Christine Dawson

For sustainable investment to succeed, investors must be attracted by performance rather than non-financial factors, according to Peter Michaelis, head of sustainable investment at Liontrust.

Michaelis was speaking at the Square Mile Investment conference in London on 22 September.

“Performance is critical for the success of sustainable investment,” he said.

“That has to be the core proposition of sustainable investing, to build a strong investment return by investing in sustainable companies. And you then demonstrate as much as you can, the positive aspects of those businesses you are investing in.”

His view was at odds with that of Jamie Jenkins, BMO managing director and co-head of global equities, who said performance is not the be-all and end-all if you are having a positive impact.

“If half the industry is just optimising return and your returns are lower but you are effecting bigger real world change then that’s pretty exciting,” he said.

“Everybody is minded to embrace sustainability and ESG so let’s appeal to the hearts and minds. Let’s not just talk about the return profile. Let’s really open up what our funds are investing in.”

Active switch

For Matthew Smith, managing director of Buckingham Gate Chartered Financial Planners, the answer is moving all active portfolios to sustainable. The firm has let clients know of the change but will not be asking if they have a preference for sustainable.

Smith explained why he is confident this is the right move: “We want to drive this as a firm but clients are bringing this to us now as well.

“Frankly, if we don’t act now, we will get left behind because there are clients out there who are searching for these solutions and probably won’t work with a firm that’s not offering them.”

The IFA said his firm decided against moving passive portfolios over to ESG because that market is still in its infancy and if you are using smart beta or smart passive, Smith said, you are making active decisions by definition. Smith didn’t rule out using this type of fund in active portfolios if it was suitable though.

Communicating sustainability

Another topic on delegates’ minds was how product providers communicate information on sustainable funds. Smith said what would be helpful for consumers is a 1–10 system to rate fund sustainability, just as there are one 1–10 risk ratings on portfolios.

According to Catherine Weeks, partner at Simmons and Simmons, the industry is not ready for this kind of simplification and it could lead to greenwashing.

Weeks warned a “deluge” of data was on its way to distributors following upcoming regulation changes.

One example she gave was the Sustainable Finance Disclosure Regulation (SFDR) requirements becoming more granular next year. Another was product providers in Europe having to start reporting on data points in the European ESG Template.

“It maybe has 500 or 600 cells with information about each product broken down. So the providers will get teams on it and supply this data point for you out into the distributor audience,” she said.

“The question and challenge for you will be less ‘tell me information about your product’ – it is going to be a deluge of information and [the challenge will be] how you filter that to try and understand what that means.”

While things look set to get ever-more complex on the one hand, Daryl Kennedy, sustainability and responsible investment policy adviser at the Investment Association (IA), said the Financial Conduct Authority (FCA) is consulting IA on a labelling system for sustainable funds. She said IA has a working group on this and the FCA is in the early stages of developing the label.

“Two key points we are feeding in to the FCA right now is the importance of consumer testing and second, to make sure the distribution community is very heavily involved in it,” said Kennedy.  

She also said the Treasury is consulting IA on the positive and negative elements of SFDR so it can recreate the best version of the regulation here.

Finding conviction

For product providers, delegates heard later, there will also be some significant challenges that come with new disclosure rules.

Matthew Courtnell, LGIM responsible investment analyst – active strategies, said SFDR will bring better alignment between asset managers than the “alphabet soup” of sustainability products we currently have, but it won’t be easy to get there.

“Some of the things Article 9 is asking for will be a challenge. It will require data but it will also require qualitative analysis and really going to the market with conviction that what we are doing, we believe is the best way to invest going forwards,” he said.

However, advisers could be asking providers some simple questions that would help them spot greenwashing, according to Michaelis.

“If I was in your shoes, the questions I would ask asset managers would be, ‘Ok, show me the past 12 months’ investment decisions – how many of them have been driven by sustainability characteristics or criteria?’ I would look at the resources being applied to the team and the experience of the people who are actually in that team doing it,” he said.

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