In association with
Sarah Ackland Head of UK Funds, Architas
hen the first UK ethical funds were launched in the early 1980s, their main objective was to help investors align their savings with their personal values by excluding specific industries such as weapons, tobacco and fossil fuels. Often, this meant a loss of performance for investors as some of these industries had historically delivered strong returns.
No longer considered a niche interest, sustainable investing is now seen as a viable source for potential returns
The value of
VALUES
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Welcome
the value of values
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Contents
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Profit with a purpose
Changing perspectives on sustainable investing
Are opinions on the move?
What do advisers think of sustain-ability?
What is the future of sustainable investing?
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The Architas funds featured can invest entirely in units of collective investment schemes. The value of the funds and the income from them can fall as well as rise purely as a result of exchange rate fluctuations. Clients can invest in the funds through a number of financial products. These funds may not be appropriate for investors who plan to withdraw their money within five years. If you require further information on any of our funds, the Key Investor Information document (KIID) and the prospectus are both available free of charge on request from Architas Multi- Manager Limited. The KIID is designed to help investors make an informed decision before investing. You can view or download all our funds’ KIIDs via our website at architas.com on the home page and the literature library. AXA is a worldwide leader in financial protection and wealth management. Architas operates three legal entities in the UK; Architas Multi-Manager Limited (AMML), Architas Advisory Services Limited (AASL) and Architas Limited. Both AMML and AASL are owned by Architas Limited, which is a 100% owned subsidiary of AXA SA (a company registered in France). AMML is an investment company that provides access to other investment managers’ services through a range of multi-manager solutions, including regulated collective investment schemes. AMML in the UK works with strategic partners and AXA Group internal fund managers, to find out more information about this please visit architas.com/inhousestratpartners/. AMML is a company limited by shares and authorised and regulated by the Financial Conduct Authority (Firm reference Number 477328). It is registered in England: No. 06458717. Registered Office: 5 Old Broad Street, London, EC2N 1AD.
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Fast forward three decades, the universe has seen significant transformation, led initially by institutional investors and more recently by retail investors. It is no longer just about ethical investing, but also Environmental, Social and Governance (ESG), impact, engagement and so on. Specialists now refer to responsible or sustainable investing as an umbrella term. By focussing on ESG considerations in their investment decisions, investment professionals have realised that they could potentially deliver performance by 1) identifying companies likely to benefit from the challenges of a world dominated by climate change and 2) avoiding - or sometimes engaging with - companies whose harmful practices may threaten their long-term viability. Sustainable investing is becoming mainstream, driven by strong client demand. We hope you find this guide useful in understanding the many opportunities that sustainable investing can bring to your clients’ portfolios as well as its challenges.
Past performance is not a guide to future performance. The value of your client’s investment and the income derived from them can go down as well as up and they may not get back what they originally invested.
Photo by Johannes Plenio on Unsplash
Many of the highest yielding investments have focused on industries and companies that don’t necessarily ‘do good’ in the world. From health-damaging tobacco firms to environment-harming oil companies, many of the best returns seemingly come at a cost to society. However, an increasing amount of people are demanding more from their money. Not just profit, but also purpose. No longer are people merely happy to hand over their savings to an investment manager and turn a blind eye to the types of companies being invested in. They want to know that their investments are being used for good or at least do no harm. Advisers are now recommending funds to their clients that specifically focus on responsible investing, while large pension funds and insurers are taking a similar approach. No longer is sustainable investing seen as mere green window-dressing to a wider investment portfolio. It’s taking centre-stage.
As a growing number of advisers, pension funds and insurers start to award new business exclusively to asset managers with a responsible focus, we review how to make responsible investing work the way investors want it to
How do advisers make sure that their clients get portfolios that reflect their concerns? Andy Willemite, Head of Investment Research at Heron House, says that it’s essential to thoroughly investigate with clients what they’re looking for from their portfolios. “Firstly, we discuss the client’s personal preferences and views, which should direct the discussion towards the type of ‘ESG’ or ethical holdings that should be appropriate for them,” he says. Willemite says that they then go through the different types of approaches available to clients. He adds that there are a number of funds that could be used, including ESG funds, screened funds, and thematic funds. (To see definitions of sustainable investing click here). “Certain funds can have much stricter criteria than others,” Willemite adds. “There are many funds with quite a light ESG overlay. ”Hortense Bioy, Director, Passive Strategies and Sustainability Research at Morningstar, says that how ESG investing is explained to clients depends on who they are: “That’s the thing with ESG,” she says. “It means different things to different people. There’s no standard definition. The question should be more: what do you want to do? What are your preferences? Some clients will just want a conventional fund and to make sure the investment manager is an active owner who votes and engages with companies to improve ESG practices.” “We will recommend completely ethically screened portfolios for some clients if that is their preference, but also include a combination of ethical and non-ethical funds for many clients." Willemite says that there are typically three types of investor that look at ESG: those with strong ethical views, others that want to avoid certain sectors or companies, and then ones that like the idea of sustainable investing. “We have a number of clients who have worked in industries such as healthcare, environmental sciences and agriculture and, as result, they tend to have strong views on these industries,” he says. “In general, our clients like the idea of investing into sustainable investment themes, for example, renewable energy or healthcare. I would say that for many of our younger clients this is becoming increasingly important." Bioy adds that many investors are concerned with environmental issues, and therefore oil companies are no longer an attractive opportunity. “Increasingly, fossil fuels are an area that more investors are thinking about and divest from, in both the institutional world and the retail world, maybe for different reasons. From a risk perspective, this is a question that’s coming up more and more.” Others just want to make a difference with their money. “You have those clients who really want to make a positive impact on the world. They want their money to be allocated to companies that deserve it and potentially focus on a theme. For example, companies that are managing their carbon exposure better than others or companies that are more diverse and focus on gender balance. Or they want to invest in certain sectors, like renewable energy.” Many investors, unfortunately, like the idea of responsible investing but aren’t entirely sure of how to go about it. Bioy says: “Really, the question is what does the investor want? The problem is that a lot of investors don’t know what they want! And then when they do, the next challenge is to find the investment products that match their preferences. Many retail investors are disappointed by the type of companies they see in funds that claim to be responsible or sustainable. Financial advisers play an important role in educating investors and managing their expectations."
Knowing what investors want
Issues relating to the quality and functioning of the natural environment and natural systems, such as carbon emissions, environmental regulations and waste.
What are E, S and G?
Photos by Ethan McArthur, Guillaume Jaillet, Adam Morse and Jason Blackeye on Unsplash
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hy do people invest? The answer, at least traditionally, seems obvious. To make money. There are various nuances. Generating a quick return, saving for retirement, getting better rates than merely holding cash. The primary objective, however, is profit.
Source: Nandini Ramakrishnan, Global Market Strategist, JP Morgan
Issues relating to the rights, well-being and interests of people and communities, such as labour management, health & safety and product safety.
Social
Issues relating to the management and oversight of companies and other investee entities, such as board composition, ownership, shareholder rights and pay.
Governance
One of the concerns that many investors have had in the past about sustainable investing is that it doesn’t deliver the sorts of returns that traditional investments will. However, according to Willemite, many sustainable investments deliver similar returns over the medium to long term. “We run sustainable portfolios as well as mainstream non-sustainable portfolios and the performance over the medium to long term of say five years plus has been comparable. There tend to be periods where sustainable screened funds underperform, if for example oil sees an uplift in value, but the opposite of this is also true.” He adds that ethical investors are now spoilt for choice and so it should be quite easy to build a diversified portfolio that delivers decent returns. “There are hundreds of ESG or sustainable funds available and many investment houses have ESG policies which are employed across the majority of their funds. This level of availability means, in our opinion, that it is possible to create well diversified, robust sustainable portfolios with strong growth potential.”
Does ESG mean compromise?
Environmental
1. Negative/exclusionary screening 2. Positive/best-in-class screening 3. Norms-based screening 4. ESG integration 5. Sustainability themed investing 6. Impact/community investing 7. Corporate engagement and shareholder action
Sustainable investment encompasses the following activities and strategies
Source: The Global Sustainable Investment Alliance (GSIA) S&P Global
majority of clients are now interested in sustainable investments, a new survey reveals, with 72% of financial advisers now offering such options. The research found that 69% of advisers are now directly asking about sustainable investing in their fact finding. According to the
We take a look at the results of Professional Adviser’s recent survey on sustainable investing among advisers and paraplanners
A
Of the financial advisers who still express concern about the effects of sustainable investments on returns, the majority cited limited investment options rather than performance per se as the main cause for reticence. Some advisers responding to the survey said they still felt sustainable investing meant compromising on performance in certain circumstances. “It’s thematic and so will increase and decrease returns depending on if it’s favourable at that time,” one adviser said. “But it will often increase risk, and therefore be more likely to decrease allocations elsewhere, which will in turn decrease returns.” Another adviser said higher risk and volatility could yield positive returns, despite a more limited field. However, the survey reveals an age and income gap when it comes to interest in sustainable investments. According to the survey, 43% of advisers said that clients over the age of 60 years old were interested in sustainable and ethical investments. Figures also reveal a drop off in reported interest when it comes to high net worth clients between the ages of 40 and 60, with 51% of advisers saying such clients interested in sustainable investments - a significant drop from lower earning clients in the same age group, where 64% of advisers said clients were interested in such investments. The drop-off in interest could be related to access to information on a changing investment landscape. A majority – 68% – of advisers who responded to the survey now ask clients about sustainable investing and personal values during fact finds and many reportedly do so as a way to introduce ESG into the conversation “to ascertain if the investor has any preference for ESG funds, to ensure we are considering a solution aligned with their interests.” Asking the right question is important when it comes to sustainable investing, according to responding advisers. However, some advisers who responded to the survey reported only talking about sustainable investment options when prompted by clients. “We rely on the clients themselves bringing this up if they have any strong beliefs in this area,” said one.
No compromise
*Other/unsure 8%
Professional Adviser’s survey of 150 financial advisers on sustainable investing, up to 62% of clients aged 40-60 expressed an interest in sustainable and responsible investment. In addition, close to one in two high net-worth individuals asked about environmental, social and corporate governance (ESG) investment options. Interest in ESG investments has grown recently as climate change and sustainability become a part of the news. This class of investments seeks positive returns and long-term positive impact on society, the environment and the performance of the business and is now very much a part of the industry lexicon. There is no widely accepted single definition of sustainable investing but according to the Global Sustainable Investment Alliance (GSIA) it can encompass seven main activities. These are ESG integration, sustainability themed investing, norms-based screening, positive best-in-class screening, negative/exclusionary screening, corporate engagement and shareholder action, and impact/community investing. This is a broad set of activities and it can involve putting a special value on companies that manage their carbon footprints, ensure labour laws are upheld throughout the value chain, and many other social and environmental benefits. In fact, nine out of ten advisers surveyed by Professional Adviser said that clients who invest in sustainable funds cite environmental or societal concerns as their main objective. Only 2% of advisers said they thought clients chose these investments searching for higher returns.
What is your job title?
How interested in sustainable and responsible investing are your clients?
Niche no more
The rise of sustainable investing has accelerated over the last 15 years. When in 2005 a study coined the term ESG, the consensus was that sustainable investing was a niche interest – often interested clients would need to seek out specialised advisers. As the public conversation around climate change shifted over the years, sustainability came to be seen as less of a fringe issue. Indeed, much of the investment industry is coming to consider sustainable investing as a marker of the financial health of a portfolio. Today, there is perhaps some enduring concern that prioritising sustainable investments will negatively affect financial performance, but this concern is lessening. The survey clearly shows that there is both an appetite for more sustainable investment options from clients, and a genuine interest in offering more sustainable and ethical investment opportunities from advisers. However, there is still a lot of practical legwork to be done to ensure that sustainable investing is the natural option: clearer information on the definition of sustainable investing and better reporting about the positive impact it can have on portfolios are the clear first steps. If advisers commit to spread the good news of sustainable investing, a widespread cultural shift in the industry will likely follow.
It can be argued that investment advisers have been slow to adopt the sustainability ethos for fear it might impact returns and limit options. However, the tides appear to have shifted as the majority – 68% – of respondents to the survey did not believe sustainable investing means compromising on performance. Advisers responding to the survey argued that while a focus on ESG might mean more limited options, the quality of investments often made up for it. One respondent added that the number of choices has grown: “The ethical label has expanded to more than ESG and this opens a much broader investment world.”
What’s the approximate figure for your firm’s total assets under advice?
What would you say is the main objective of your clients who invest in ESG?*
Do you include ESG/personal values related questions in your fact find?
Do you offer ESG products to help your clients meet their investment objectives?
68%
of advisers surveyed do not believe sustainable investing means compromising on performance
9/10
advisers surveyed said that clients who invest in sustainable funds cite environmental or societal concerns as their main objective
A majority – 68% – of advisers who responded to the survey now ask clients about sustainable investing and personal values during fact finds
Photo by Dan Dealmeida on Unsplash
How can advisers respond to the increased interest in sustainable investing? Architas' Frank Potaczek helps us interpret the results of the Professional Adviser survey
Do you think advisers and their clients are enthusiastic about sustainable investing?
If you’d asked me as little as 12 months ago, I might have said it’s only for niche clients. But a change has come, particularly over the past 12 months, not because of the hype that you see in the trade press but because everyone is talking about sustainable investing: look at single-use straws, plastic cups, the BBC’s Blue Planet and plastics in the ocean, VW emissions scandals – and now Greta Thunberg presenting to a multi-party parliamentary meeting and becoming Time's Person of the Year.”
It underlines the need for education, not only for consumers but for advisers. The term ESG is something that’s come from the institutional investment industry. If I went to my kids’ school and said "Are you interested in ESG?" they’ll say “What are you talking about?” If I said "Are you interested in sustainable investing?" then you get, "Okay, tell me more." So, I’m not disappointed: I would welcome more education and for the industry to understand the importance of the language that we use.
90% of respondents said either that they had no questions from clients on ESG or under 10% of their clients were asking questions. Is this disappointing?
The shift away from single-use straws is just one of the changes happening as a result of sustainability concerns
Around 62% of advisers now think investors aged 40-60 are moderately interested in ESG. Does this show that ESG isn't just a concern of younger generations?
I would go beyond that. My mother is widowed but retired and wants to invest money for her grandchildren. Not an awful lot but she wants to make sure there is a sustainable world for her grandchildren to inherit. That’s why the whole nuance of “the millennial” has been changed towards “millennial values”. My mother has millennial values. Remember that when Fair Trade was introduced back in the early 1980s, it was just for the fringe. Now, it is front and centre.
Many advisers (68%) now include ESG/personal values related questions in their fact find. But are advisers collecting the right information to steer investors towards the right funds?
A hard core of advisers have been doing this for a long time so they can help specialised client groups such as specific religious groups and affinity members. They have the tools. But a lot of advisers have only just had to start thinking about sustainability due diligence, and how to pick and combine funds together to derive a particular outcome. We understand, as fund pickers ourselves, that it’s hard to create a process to pick the right funds, to create a portfolio of all the different approaches to sustainable investing, and still maintain a good outcome for clients.
Should investors pursue sustainability as a broad theme or pursue specialist agendas?
A small section of purists will want their portfolios to be really climate change impacting or address specific issues that they care about. But if you are looking at the mainstream, most people simply want the feeling that the money is doing good. We feel they are happy to outsource the more specialist decisions to their asset manager. As a fund of funds provider, we can then engage with the fund managers to say okay, our clients demand a portfolio that is either engaging with the “naughty” companies who are polluting the planet to encourage them to clean up their act, or engaging with the people who are at the forefront of renewable resources, or making sure that there is diversity on boards, and so on.
About two-thirds of advisers think that ESG doesn’t involve compromising on performance; does that make you feel optimistic?
Very optimistic. There are a number of academic studies that suggest you are not necessarily missing out on performance if you target socially responsible themes. One of the latest studies was from MSCI and published in the Journal of Portfolio Management in July 2018. It basically says that there is a link between ESG characteristics and performance and risk. You can get good performance from avoiding losers as well as by buying winners. And investors might have protected themselves from negative ESG incidents in companies like BP, VW, Facebook, Uber and Experian, with the appropriate screens.
The most commonplace standard is provided by the Global Sustainable Investment Alliance (GSIA). They've introduced a definition of sustainable and responsible investing which lists seven different activities.(1) ESG is simply one of the seven (To see the full list click here). Another interesting contribution is the United Nations Sustainable Development Goals (UNSDGs).(2) Here you have 17 themes, all colour coded: gender equality, life on land, life below water, sustainable cities and communities, no poverty, to name but a few. A lot of asset managers are coalescing around the UNSDGs. We tested the graphics with end-investors and it really helped with tangibility and understanding. It would be great to use the SDGs as a way of showing people where their money has gone and the things they're looking to – for want of a better phrase – impact or cure. We can start to capture the imagination of end-investors. A particular fund in our portfolio, for example, might be able to say that 7% of the fund is related to SDG number six, which is clean water and sanitation. We could even follow the colour coding to help clients understand the social development goal that has been achieved.
What are the key industry moves to standardise sustainable investing goals?
I was involved in the 1990s with an ethical fund, when ethical was really the FTSE 350 index with all the naughty stocks taken out. That was it. I'm the typical adviser demographic, and we all grew up on exclusion factors. Some 25, 30 years later we’ve learned that to get the right outcomes you need to engage, e.g. with the fossil fuel companies to get them to change from being oil and gas companies to renewable energy companies. My generation has had to alter our view from exclusionary to engagement.
How has sustainable investing changed in two decades?
Frank Potaczek,
Head of UK Proposition, Architas
Whether they are investment advisers, run model portfolios or outsource, advisers want to understand this new marketplace.
Sources: (1)See Sustainable Investing Defined, Global Sustainable Investment Alliance, 2018 Global Sustainable Investment Review, p.7, available at http://bit.ly/2Jz5104. (2)The 17 United Nations Sustainable Development Goals are fully described at http://bit.ly/2WBuwmU.
Advisers who associated ESG with compromised performance often said this performance was inevitable because ESG limits the investable universe. Is that so?
On face value, it does seem logical. However, if you look at how funds are picked anyway, there are something like 9,000 funds that we as multi-managers can pick from. So, we have various filters to narrow that down to a manageable range of, say, 500 funds that we want to invest in. Really, ESG is just another filter to narrow down that investable universe.
What three things should the industry do for advisers and investors?
The first one is to help advisers educate themselves. Whether they are investment advisers, run model portfolios or outsource, advisers want to understand this new marketplace. The second is to help advisers talk about sustainability with their clients, including what sustainability means in pure investment terms. Take the emotion out, look at what the data is saying, and share that data, e.g. to show that on average you may well not miss out – though obviously you will have good and bad performers and various sectors. The third is to coalesce around agreed standards. The big fund groups are still arguing about definitions. As a multi-manager, that can suit us because it gives us a role providing simplicity for our advisers and for their clients. But eventually there will have to be some standards.
Finally, what big-picture trend stands out from the survey results?
I was very pleased that there were a lot of advisers that are very positive about ESG and investing sustainably. It shows the direction of travel. Yes, a lot of advisers still need convincing that this is a mainstream investment type. But had this survey been done two or three years ago, I don’t think nearly as many advisers would have been so on point.
What are the views of some leading financial advisers on why sustainable investing is here to stay
What do advisers think of sustainability?
nvironmental Social Governance (ESG) is a growing global theme and according to the Association of Investment Companies “more investors want their money to be invested in a sustainable way or in a way that makes a positive impact.”
Mark Mobius, joint manager of the Mobius Investment Trust, says ESG as part of a wider portfolio is a way to manage risk. He told the AIC(1): “First and foremost, taking ESG seriously means risk management. Companies that have good corporate governance and pay attention to the environment and social issues run less risk of becoming involved in scandals, having to pay fines or facing social problems.” Mobius adds: “A recent study shows that companies implementing changes to environmental, social or governance standards following engagement from investors generated more than 7% of excess returns after 18 months. By taking ESG factors into account, investors can significantly reduce the risk profile of their investments, which over the long term not only translates into positive risk-adjusted returns, but also positively impacts all stakeholders.”
E
Source: (1) 'Is green the new black?' The Association of Investment Companies, March 2019
The head of ESG and sustainability at Partners Group, the investment manager of Princess Private Equity, believes that the integration of material ESG factors into the investment processes is a “core part of our duty” to act in the best interest of clients and their beneficiaries.
Creating value from ESG factors
A report by S&P Global, titled ‘The (Financial) Future Is Female’, found that in most of the markets surveyed, “women are more likely than men to weigh a company’s environmental and social impact when making investment or purchasing decisions.” The report adds: “With women holding as much of the world’s total wealth as men, it seems clear that fund and asset managers’ increasing focus on ESG issues is here to stay.” And there is traction in the baby boomer generation of investors. Julia Dreblow, founder of SRI Financial Services, says: “There are a lot of older investors who five, 10, 20 years ago weren’t interested in climate change and pollution, but now they understand that things are changing and they recognise what is happening to the planet, so we shouldn’t necessarily write off older investors.”
Who is investing in ESG?
Dennis Hall, director and CEO of Yellowtail Financial Planning, believes that sustainable investing is here to stay: “We have gone through various changes, various regulations, we have had all those changes to deal with. Now you have social media, TV programmes, there have been conversations about plastics pollution and global warming, it is now part of the daily conversation. And I think SRI’s time has come.” Ricky Chan, director and chartered financial planner (CFP) at IFS Wealth & Pensions says: “Sustainable investing is still a niche but fast growing area. I’m a big fan of ESG funds and the positive contributions they have on society. “They help to align clients’ desire to grow their investments with their values, so that profit isn’t gained at the expense of their, their children's or grandchildren’s future. Investments are typically channelled into worthwhile companies/organisations that fit clients' ethical aspirations and mandates. “We have clients of all ages investing ethically, we tend to find an increasing appeal among younger/middle aged investors.“They usually have either read something about ethical investing already or are open to learning more about it during our meetings. This enables them to experience and connect the tangible benefits of investing with the intangible concepts of investing and retirement planning/pensions. Consequently, I find that this helps them become more engaged with their overall financial planning.”
A new mainstay
Past performance is not a guide to future performance. The value of your client's investment and the income derived from them can go down as well as up and they may not get back what they originally invested.
Buying and investment behaviour and environmental and social responsibility
Source: S&P Global
Adam Heltzer explains: “When it comes to managing ESG factors effectively, we believe private market investors have inherent corporate governance advantages compared to their public market peers, both in terms of mitigating ESG risks and creating value from ESG factors through targeted value creation initiatives.
“Our active, hands-on ownership model provides opportunities to work closely with portfolio companies to implement superior, sustainable investment strategies and enhance investment returns.”
Definitions: sustainable investing
click here
Architas’ Tom Woodfield and Sheldon MacDonald discuss the growth of the sustainable investing market, its biggest challenges, and how their new fund of funds can help investors do the right thing
Portfolio snapshot: emphasising diversification
Some of the fund’s portfolio is invested in non-mainstream assets, which during periods of stressed market conditions may be difficult to sell at a fair price, which may in turn cause prices to fluctuate more sharply than usual.
Source: Architas, as at 31.12.2019. Please note data shown may not add up to 100% due to rounding and the allocations may change. Funds are grouped according to their primary asset class exposure. *The negative cash position relates to accrued underling expenses.
DIVERSIFICATION ACROSS ASSET CLASSES
DIVERSIFICATION ACROSS INVESTMENT MANAGERS
Tom Woodfield,
ESG analyst, Architas
Younger people especially are thinking: “How is the way I put my money to work impacting the real world?”
How fast is sustainable investing growing?
Tom: According to Morningstar(1), at the end of June 2019 sustainable funds had EUR 1.06 trillion under management, up from EUR 992.5 billion a year earlier, a 7% increase. Assets in non-sustainable funds grew just 2%, from EUR 9.82 trillion to EUR 9.97 trillion. A fair amount of that asset increase could be the rally we saw in the market but sustainable investing is growing and here to stay.
Source: (1) Morningstar Direct, Data as of 30 June 2019
What's driving that growth?
Tom: Many different drivers. On the institutional side, there's a recognition from asset owners that incorporating ESG into investment processes makes sense from a pure risk management perspective. The retail space has been slower but information travels so much quicker now with social media that there's just more awareness around environmental issues such as climate change, social movements, and company ethics. Younger people especially are thinking: “How is the way I put my money to work impacting the real world?”
Sheldon: Also, misconceptions are being broken down, such as that sustainable investing condemns the investor to underperformance. After a long period when investors couldn't perceive any bottom-line benefit, in the last couple of years, in some spaces, you've seen sustainable investments outperforming regular indices. Hard-nosed investors are sitting up and taking notice. And it’s not just younger investors: older investors are interested too, including those who want to tie into their grandchild's green sensitivities when leaving them money
How important might sustainable investing become within global retail investing in the next five years?
Sheldon: Very. I think in five years’ time, we won't be speaking about ESG integration because it will just be automatic, it will be assumed. Most funds out there will need an ESG policy, i.e., some sort of bottom-up incorporation of environmental, social, governance into their investment process
Tom: Unlike ESG integration, sustainable investing more broadly will still probably remain, in the next five years a significantly growing sector rather than becoming all-encompassing.
What can be done in terms of educating retail investors?
Tom: It starts with the financial advisers, who’ve been bombarded with different terms and buzzwords. The industry itself must agree on standardisation, through moves like the Investment Associations (IA) new Responsible Investment Framework, which helps articulate the different ways in which the industry carries out responsible investment approaches. That's the key starting point because once everyone is on the same page, you can start to get more consistent due diligence, which should feed into better outcomes.
How much time will it take the industry to develop a common language?
Tom: A lot of the proposals in the European Commission sustainable finance action plan are set to come into force at the end of 2020 or the beginning 2021, which gives an idea of the necessary timescales. However, the Investment Association Responsible Investment framework moved from consultation phase - which Architas participated in - to implementation phase within the space of a year. So it shows that this is something industry bodies are rightly prioritizing.
What is the biggest challenge to sustainable investing’s bright future – investor confusion or cynicism?
Sheldon: I come at it from an investment perspective and the big risk is that you see sustainable funds underperform. Investors might think that industry claims were all a lie, leading to something almost like a hedge fund crisis, with investors just giving up. It’s a risk because sustainable investment approaches can steer investors away from specific sectors such as oil.
Tom: In the recent past, there was also a real risk that anyone could just jump on the sustainable bandwagon and say anything they wanted, turning sustainable investing into a kind of Wild West. That risk is receding, given moves towards more regulation. Standardisation should further reduce the risk of 'greenwashing' (e.g making misleading claims about your environmental credentials).
Is sustainable investing already reaching a positive tipping point or will it take some further environmental crisis to send it into orbit?
Tom: You've already got the UK parliament declaring a climate change emergency; you've had the Extinction Rebellion protests. People are beginning to pressure governments to act. So for me the direction of travel is already set. As for further external tipping points, if we get to that stage, it's probably already too late!
So how will your new sustainable investing ‘fund of funds’ – The Architas Positive Future Fund – help retail investors take action?
Sheldon: We want this to be somebody's first step outside of a purely conventional investment. It could be an investor's only investment, so it aims to provide fairly broad multi-asset returns, akin to what you would get in a conventional multi-asset fund. But at the same time, it assures the investor that their money is doing some good, and I mean actively doing good – not simply negatively screening out 'bad' companies. So it will target some very specific themes, which may change over time, depending on sustainable investment opportunities.
Which of the various approaches to sustainable investing will your new fund of funds target?
Tom: The four areas we target are 1) positive, best-in-class screening approaches. That's where you screen investments in rather than excluding them. And then 2) investments where environmental, social, governance integration is key to the investment process; 3) where there's a sustainable thematic objective for the fund; and 4) where there's an impact investment objective as well. Funds that we consider for inclusion in the fund must cover at least one of those four bases.
Are there contradictions, e.g., could an impact investment have horrible governance?
Tom: That's why we have two strands to our approach. We include funds that have a sustainable investment objective, e.g., impact investing in our initial universe construction, but we also have an underlying environmental, social, governance analysis that I carry out within the investment team. This ESG analysis ensures that fund managers are also looking at how companies manage non-financial risks and opportunities through an ESG lens.
Sheldon: Meanwhile investment analysts look at the funds in terms of their investment benefits, goals, ambitions, strengths and weaknesses etc., so we can score an investment from a hard-nosed investment perspective. Tom might be saying “These guys are the best from an ESG persepctive" but the fund must also stack up from an investment perspective….
Was it easy to decide to launch a broad-based fund rather than one that targeted a specific approach, such as impact investing?
Sheldon: We had an interesting brainstorming session several months ago and one idea was to go down the building blocks route – we know investors can feel very passionate about specific issues. So let’s have a climate change fund, let’s have an empowerment and inclusivity fund, and so on – and then let investors choose which causes they’d like to support. This is something that we would consider for the future. For now, it’s premature because most investors haven’t quite determined what it is that they want. So the idea of the Positive Future Fund is really to establish a beachhead. It’s designed to be as widely accessible as possible. We might miss out on people who want to focus on something very specific. But there’s a much broader group of people that just know they want their money to be doing some good.
Introducing the Architas Positive Future Fund
Sheldon MacDonald,
Deputy CIO, Architas
We have two strands to our investment approach. First, we review all funds with a sustainable investment objective to assess their team, process and performance. Our ESG specialists then carry out an environmental, social and governance analysis of the funds. We don’t simply take a fund or manager at face value, we need to make sure they are living by the values they have set themselves. If they don’t we will not invest in the fund. The four areas we are targeting with the Fund are: first, positive, best-in-class screening approaches. That's where we screen investments in based on strong ESG credentials rather than excluding them; second, investments where environmental, social, governance integration is key to the investment process; third, where there's a sustainable thematic objective for the fund; and finally where there's an impact investment objective as well. Funds that we consider for inclusion in the Fund must cover at least one of these four areas.
How is the new Architas Positive Future Fund providing investors with a vehicle for their sustainable ambitions?
The multi-manager Positive Future Fund is the first sustainable investment product from Architas. Using a blend of active and passive funds, this multi-manager fund invests globally across equity, fixed income and alternative funds, guided by the UN Sustainable Development Goals. The Fund is aimed at those investors who are looking for a return but also want to know their money is having a positive impact on society and the environment. At launch (August 2019) the fund had an AMC of 40bps and an OCF of 110bps. The Fund is managed by Deputy CIO Sheldon MacDonald and Senior Investment Manager Solomon Nevins.
