This interview is from The Good Investment Review, October 2022, which is available to download for free here.
Here, Square Mile’s Head of 3D Research, Anna Mercer, and CEO of The Big Exchange, Abi Sater, discuss their opinions on the recent trends in Responsible Investment (RI) and their predictions for how these will move forward in the coming years.
1. There has been a significant increase in interest in Responsible Investment recently. What do you believe is driving this?
Abi: In our experience, investors choose to invest in RI funds for a variety of reasons. There are those who have chosen to lead a sustainable lifestyle and want that decision reflected across all aspects of their life, from recycling more and consuming less to favouring electric vehicles or withdrawing their support from businesses that treat their workforce unethically. By extension, they expect their savings and pensions to be invested in a way that aligns with their beliefs.
Other investors are motivated by the potential for financial gain but do not want their returns to come at the expense of degrading the environment or harming society.
Finally, there are those who believe passionately about specific causes, be that combatting climate change or building a more equitable society. They are equally passionate about supporting businesses that further these causes or avoiding companies which run against their beliefs.
Anna: People are far more attuned now to their personal responsibility for tackling the very grave issues facing the planet. For instance, it’s impossible to ignore the impact of climate change, particularly in light of the extreme weather events we are increasingly witnessing and the devastating effect that they have on people’s lives and the environment. Therefore, it seems almost natural that, given the choice, investors would prefer to invest in businesses that are part of the solution to these very concerning challenges.
It is also fair to say that people are more engaged with their finances nowadays. Investors have greater access to information on their investments and feel more empowered to question how and where their capital is being allocated. Importantly, initiatives such as The Big Exchange help to provide transparency on how RI are being invested and enable consumers to scrutinise their investments and take any necessary action to effect the change they want to see.
2. Investing should be for the long-term, and this is perhaps more pertinent to RI funds – why is this?
Anna: The asset management industry is very good at using terms such as growth and value when describing styles of investing which come in and out of favour, and it is true that the current market environment is not supportive of many RI funds which usually fall into the ‘growth’ camp. Put simply, the types of business that have done well since the beginning of the year, the likes of those in the energy sector, will not typically be found in RI portfolios, as they tend to exacerbate many of the environmental problems we face. Meanwhile, many companies that form part of the solution are typically in more nascent, less established sectors which can be more volatile and less defensive.
It is important to remember that all investment approaches face head and tailwinds at differing times but issues such as climate change play out over the longer term: investors should have a similarly long-term horizon when investing in companies which help address them.
Abi: In our experience, those who invest responsibly are convinced of the long-term opportunity presented by companies that are on the right side of the transition to a cleaner environment and a fairer society
They are also comfortable to ride out some under-performance as part of their investment journey. However, in the face of the cost-of-living crisis and inflation eating into consumers’ disposal income it is easy for short-term financial concerns to overshadow long-term financial planning.
The fund industry is often guilty of relying on jargon to describe the styles of investing which fall in and out of favour depending on the market backdrop. This is lost on most investors creating a pressing need for fund groups to educate investors on how funds should perform in different economic conditions. After all, responsible funds aim to provide long-term solutions to long- term problems and their performance should not be judged on a quarterly basis.
3. Accusations of ‘greenwashing’ have undermined investor trust in RI. What can investors do to ensure a fund is delivering on its promises?
Anna: Unfortunately, there are no standard reporting metrics to help investors interrogate the funds they are considering. However, one starting point is to compare a fund’s marketing literature with some of its more factual documents available such as the Key Investor Information Document to ensure there is consistency in the way a fund’s objectives are presented.
Investors should interrogate what objective a fund is trying to achieve, its approach to achieving it, and how it measures and reports success. Where possible, investors should look under the bonnet to check a fund’s investments fit with its stated objective. For instance, if a fund that claims to combat climate change has substantial holdings in pharmaceuticals, alarm bells should ring.
Abi: I believe there needs to be a level of shared responsibility. Asset managers have a duty to provide all necessary information on a fund’s objective, process, and investments to enable investors to make an informed decision on whether it matches expectations. This information needs presented in a format that is understandable to all investors.
Responsibility also lies with investors to research funds to the best of their ability, as they would any other major financial commitment such as buying a new car. The Big Exchange, for instance, helps improve transparency by publishing free-to-access impact assessments for all funds available on the platform. The financial services industry has a tarnished reputation when it comes to clarity but this is an excellent opportunity for it to regain trust through enhanced, transparent communications.
4. Finally, what changes might encourage greater uptake of Responsible Investment?
Anna: I think a commitment by asset managers to transparent, consistent reporting frameworks would increase investor confidence, helping them make sense of the options available and compare them on a like-for-like basis. The funds industry can learn a lot from the charity sector. Charities are well-accomplished in telling their story in an engaging way, making a personal connection with donors and evidencing how money is put to work in supporting their cause.
Abi: Whilst acknowledging these can be complex subjects, I believe fund managers should be trying to keep it simple. They should be able to simply explain a fund’s responsible investment objective, its process, its fee structure and any other metrics that are key to investors making a decision. In embracing simplicity and transparency, and moving away from jargon and complexity, the investment industry has the potential to be a huge force for good for the environment and society.