Parmenion Investment Management’s senior investment manager Mollie Thornton has told ESG Clarity advisers are asking the firm increasingly sophisticated questions around ESG and sustainability.
As a result, the firm is increasing pressure on fund managers they hold in portfolios for evidence of engagement, voting, affiliations, as well as diversity within their own teams and organisation.
Here, Thornton answers ESG Clarity’s questions:
The Parmenion ethical range was launched 10 years ago. How have client expectations changed between now and then?
Clients are asking for detail on portfolio holdings and negative exclusions. Topical questions are coming through around fossil fuels and China (and Russia more recently). Clients also seem to be becoming more aware of the power that stewardship can have and are increasingly looking to utilise voting shares as well as becoming more actively engaged with investee companies across equities and bonds.
There is also more of a positive focus. Ten years ago the focus for investors tended to be on what to avoid – ie exclusions, and this was evidenced in the type of ethical RPQs that were available at the time. Today, whilst there remains demand for exclusionary approaches, many investors are seeking to support change most often achieved through engagement and positive proactivity.
We’re also increasingly being asked about how we run our business and initiatives we have at a firm level to improve our sustainability footprint. We’ve recently become a UN PRI signatory and published our Responsibility Matters statement on our website explaining how we incorporate ESG considerations into our business as a whole, our investments, and specifically our ethical solution.
The advisers we work with have a strong understanding of ESG/ethical investing and we’re getting asked increasingly sophisticated and detailed questions. Their end-clients seem increasingly aware of how their money is investing and wanting this to align with their ethical views.
The range includes Responsible Leaders, Sustainability Leaders, Ethical Leaders and Traditional Ethical Leaders. Which is the most popular with clients?
Ethical Leaders, which has a balance of positive ESG themes and negative ethical screens, is our most popular portfolio and is the biggest in terms of the value of assets invested across our clients. Some funds we own include Edentree, Montanaro and funds in Liontrust’s sustainable future range.
However, our Sustainability Leaders profile has grown fastest over the past 12 months and is now the second biggest in terms of assets. This reflects investors increasingly wanting to invest in companies tackling environmental and social challenges. For example, the product has exposure to companies involved in electric vehicles, circular economy, industrial efficiency, water, waste and recycling, healthcare and diagnostics, education, care homes, renewable energy. This profile therefore offers a broad array of opportunities and includes fund managers such as Wheb, Pictet, Impax and Stewart.
What are your key considerations when looking to add a fund to these portfolios?
We undertake research including a meeting with the fund manager and detailed quant analysis. This is required before any fund can be purchased across our solutions and is also completed on an annual basis. As well as our standard investment considerations, we also look at various ESG metrics in our fund due diligence around voting, engagement, negative screens, any net zero commitment by the firm and diversity of the investment team.
In addition, in our ethical solution, we have an experienced panel of four independent industry leaders on our Ethical Oversight Committee. They help us really dig into the detail on all of the funds held in our ethical solution and conduct their own additional research before we buy a fund and every two years ongoing. They will also investigate the level of resource in the RI and stewardship teams and assess positive and negative ESG screens and how these are applied. They look at engagement and voting activity by the fund manager and want to see affiliations the fund managers are signed up to, as well as the quality of thought pieces and literature on ethical topics. Finally, our EOC reviews the full list of holdings in each fund.
Do you have any engagement priorities with the fund managers you work with for the coming year?
As part of our due diligence on all funds, we want to see evidence that equity managers are voting their shares, and we look at their support for shareholder proposals on climate change and diversity topics. For all funds, not just equity, we want to see managers engaging effectively with a meaningful portion of their portfolios. We also look at their affiliations, for example if they are signed up to the 2020 UK Stewardship code, to demonstrate a genuine commitment rather than just being opportunistic, helping limit the risk of accusations around greenwashing.
We do conduct top-down engagement with our fund managers on certain topics from time to time. Recent examples are our annual diversity survey in which we quiz all the managers on gender diversity in their portfolio manager and analyst teams, as well as their hiring over the last 12 months to see the direction of travel.
Over recent months, we’ve also been looking at which of our managers have made a net zero commitment and engaging with managers who haven’t yet made a commitment to understand why not.
What are the challenges and opportunities for your responsible range over the coming years?
In terms of challenges, the ability to report more granular data to clients on the ESG metrics across their portfolios is something that faces our industry. We have undertaken a lot of research here and have now selected an external ESG data provider. We are increasingly using this ESG data in our fund research and are preparing ourselves to be in a position to help advisers with new climate and ESG reporting requirements that may come into effect in due course.
However, there can be gaps and inconsistencies in data, so we need to think carefully about how we report to clients, in order to give transparency and a fair reflection of the portfolios’ ESG credentials, without overstating the ESG characteristics or becoming confusing. It’s a big project.
There are a number of opportunities and we anticipate a huge growth in available funds across multiple asset classes. This will enable us to continue diversifying our ethical range by asset class, fund, sector, geography and company. Our 12-strong in-house investment team and the four members of our EOC means we have significant breadth and depth of resource to research new opportunities as they come through and continue to identify leading funds to deliver against the solution’s mandate.
We are proud of our track record and heritage in ethical, ESG and sustainability investing. With 10 years of proven capability we recognise we need to share our message more broadly to help advisers find a solution to meet the needs of their clients. Our straightforward and easy to use decision tree helps advisers to navigate this complex space, helping to make the complex simple.
