Charities are increasingly, and rightly, questioning how their funds are invested. We look at how we can all make the world a better place through our investments and the best ways to have an impact.
When it comes to making Planet Earth a better place, ordinary investors don’t always spring to mind as a driving force for change, but maybe we need to reset our thinking.
There is a growing consensus that moving money to more sustainable funds is right up there with giving up flying or cutting down your meat consumption if you’re serious about reducing your carbon footprint.
So, how can charities go about using their investments to make a positive change in the world? Let’s look at the options.
The most obvious way to do this is to simply avoid investing in certain industries or to invest in funds explicitly excluding industries like fossil fuels, tobacco, munitions and gambling. This is known as negative screening and can also be achieved indirectly by lobbying.
Campaigners claim 1,244 institutions managing $14.61 trillion between them now exclude fossil fuels from their portfolios, largely due to lobbying. Half of Britain’s universities have cut investment ties with the industry, as have two of the country’s biggest pension schemes — the Universities Superannuation Scheme and the National Employment Savings Trust (NEST).
The idea is that choking demand for shares in these industries can put downward pressure on the share price, making it harder and more expensive for companies to raise capital. In turn, this can drive the value of sustainable companies up, making it easier for them to raise money and grow.
In theory, the net effect of this should be to redirect capital — the lifeblood of business — to sustainable companies and also avoid being left with stranded assets, like shares in fossil fuel companies rendered valueless by the switch to renewable energy. However, investors should be cautious about the effectiveness of this approach since there is no empirical evidence to suggest that their capital allocation decisions influence the growth of large, established public companies, which generally continue to have ready access to capital.
Negative screening on its own is insufficient – you also need to apply sustainability checks and filters around all your investments. This is where environmental, social and governance (ESG) factors come into play.
Positive investing through ESG
Managers looking to invest sustainably judge companies on their ESG performance, looking for best–in–class businesses that take their responsibilities to the planet, their staff, customers and neighbours seriously, and are run transparently and well.
Growing academic evidence shows that taking these factors into account can boost investment performance.
There are a number of specialist agencies that research and rate companies for their ESG performance, although ESG screening isn’t flawless as different ratings agencies can reach varying conclusions about a company from the same evidence.
In July 2020 it emerged online fashion giant Boohoo was selling clothes from suppliers paying some UK workers just £3.50 an hour — nearly 60% below the minimum wage.
After the story broke, several of the country’s biggest sustainable funds investing in Boohoo sold their holdings.
Known as ‘divestment’, this tactic is a drastic last step because once you’re no longer a shareholder your power to effect change in a company shrinks dramatically.
Pensions Minister Guy Opperman welcomes investors seeking to use their savings more positively and advocates constructive engagement. But he disagrees with campaigners forcing pension schemes to divest ‘high–carbon stocks’ since, in his view, the tactic of simply selling them to others without the same environmental concerns is counterproductive.
The power of engagement
Shareholders can bring about change, but it can take time and patience, and may require collaboration.
As a firm with strong values and around 60,000 clients who also have values, plus over £60 bllion in assets, Rathbones’ attendance at AGMs can carry a lot of weight, but that can be hugely multiplied through collaboration with other managers via the Principles for Responsible Investment (PRI) or Climate Action 100+.
Back in 2010 Rathbones challenged the oil giant, Shell, about the environmental and economic risk involved in its activities in the Canadian oil sands, an expensive and carbon–intensive way to generate oil. In 2017 Shell sold most of its holdings there.
In 2013 Shell considered drilling in the Arctic and we attended the AGM to challenge this. The company eventually retreated.
Between 2014 and 2018 we endeavoured to persuade Shell to set rates for reducing carbon emissions. After initial resistance, Shell’s stated ambition now is to become a net–zero emissions energy business by 2050 or sooner.
We’ve been working with large utility company Scottish and Southern Energy since 2014, to reduce carbon emissions in line with societal expectations. It now plans to align itself with Paris Agreement targets and make part of its executive pay dependent on achieving its targets.
Research by Professor Elroy Dimson of Cambridge University’s Judge Business School, shows engagement is much more likely to be successful if investors —large investors in particular — coordinate their efforts. The research shows that when a firm responds to engagement, the following year its share price rises by 8.6% for corporate governance issues and 10.3% for climate change matters on average.
Collaborative engagement is not always easy but at its most effective, few methods can match it.
Another argument for engagement is that you can continue to press for improvements on environmental, social and governance (ESG) matters.
We’re proud to have been instrumental in ensuring that the UK’s Modern Slavery Act 2015 included a clause obliging large companies to report on their efforts to deal with the problem.
This year we found some of the 350 largest listed companies in Britain were ignoring this demand and orchestrated a campaign attracting a coalition of 97 investment managers and pension funds with combined assets of more than £7.8 trillion under management. Identifying 61 companies as serious laggards, together, we wrote to them before the AGM season, asking them to comply with the Act and disclose actions taken to identify and eliminate slavery in their supply chains. We warned we would vote against their reports and accounts if they didn’t take action.
The vast majority of the companies we targeted have made changes to become compliant. Whether this is sufficient to reduce slavery materially is open to debate, but encouraging firms to actively look for signs of it is a good starting point. We know there are millions of modern slaves globally, including an estimated 136,000 in the UK, so it is bound to affect most supply chains at some level.
We‘re not satisfied with companies that simply report they don’t have a modern slavery problem, without evidence of the checks they have in place to ensure their supply chains are clean. We want companies to be open about potential issues and tell us what they’re doing to address them. Transparency is everything.
Going the distance
Rathbones recognised the importance of responsible investing years ahead of many of our peers. We began managing ethical and sustainable portfolios in 1997 and became a PRI signatory in 2009.
We know we have to continue to adapt and invest accordingly. Our priority is to protect and grow the wealth of the charities and families who entrust it to our care. Their interests often span generations, so we are long–term investors.
It is in our clients interests that we invest in sustainable businesses and try to make businesses more sustainable through engagement.
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