What is behind the growth in responsible investing?
Since the end of the global financial crisis, markets have been on one of the longest bull runs in history. Yet, as wages stagnate, productivity slumps and living standards drop, large swathes of people in Western democracies feel left behind. The incremental return on investment has plunged and inequality has risen. That lowers economic growth further because the average worker has a higher propensity to spend additional income than the average wealthy capital owner.
Capitalism is delivering returns for shareholders, but not in a sustainable way if stakeholders – employees, customers and the wider world – aren’t sharing in the benefits or worse, if they are paying a cost for delivering those returns. Many have lost trust in capitalism itself.
Executives and investors must consider a new approach, one that acknowledges that long-term profits depend on a diverse, thriving ecosystem. One that acknowledges that a healthy, well-paid, socially mobile workforce matters for market size and productivity; that insurance losses from climate change-related events have increased fivefold in recent decades and that the environment and financial stability are connected; and that companies are better off prioritising basic research and investment over financial engineering. Capitalism isn’t the problem, it’s the solution – when pursued responsibly.
What are the main challenges around this type of investment?
There are challenges in operating a detailed stance on Environmental, Social and Governance (ESG) considerations for firms that treat each client individually, with their specific needs and requests met. Our equity research analysts incorporate an evaluation of governance risk as part of their investment case, using non-financial data and information, and this is debated as part of our stock selection process. Interestingly, over time, various social and environmental issues have become governance issues, as governments have begun bringing in legislation in areas such as carbon footprint, gender pay gap reporting and supply chain transparency.
Most of our charity clients are long-term investors. Many are endowments with infinite time horizons. Therefore, we must ensure that we do not diminish the investment returns of tomorrow, which are intimately linked to the investment decisions of today. Although there is actually a now substantial body of evidence to suggest that businesses with the most sustainable practices are better performing than their peers.
Where do you expect to see the most growth?
Society faces massive challenges – dwindling natural resources, climate change, and increasing inequality of pay, just to name a few – and people are demanding change. This is a massive opportunity for companies that can find sustainable solutions to our environmental conundrums, address inequality and offer sustainable products to clients who vote with their wallets. And this is no niche market – the Business and Sustainable Development Commission estimates that achieving the UN Sustainable Development Goals will create at least $12tn in market opportunities.
We believe investing in firms with a solid purpose can deliver benefits to society, as well as maximising returns to shareholders. Capitalism has a future if it reconnects with this founding purpose and if shareholders are encouraged to act with a view to the longer term. As long-term investors, we must seek to do what is in the best interests of our clients. This includes investing responsibly, thinking through the true long-term costs of all assets we invest in and seeking sustainable returns. Societal problems and investment returns are intimately linked; the solutions for society and investors are one and the same.
Interest in joining collaborative engagements is growing across the business, our industry and the wider world. I am excited to see the impact we can have by engaging more staff on these issues and the opportunities we have as investors.
What is Rathbones’ involvement in the PRI?
Our involvement with the Principles of Responsible Investment (PRI) goes back to 9 September 2009, when we wrote a letter to the UN marking our formal acceptance of the core six principles. Our membership, in what was then a fledgling organisation, was something that very much resonated with Rathbones given our history and culture, and was something we very much wanted to be involved with.
When we signed up, Rathbones had around £10bn in assets under management, compared to close to £50bn today. Our membership was spearheaded by Rathbone Greenbank Investments, a team that has more than 20 years’ experience in delivering specialist ethical and sustainable investment portfolios.
The decision to sign up to the PRI was a strategic one, supported by the wider organisation, to align with the principles and commit to building on our existing approach. The most important step was recognising that governance and other non-financial risks can be material factors in the determination of investment risk and return outcomes for our clients.
Today, we are committed to progressing the responsible investment agenda, interpreting this in the context of individual client objectives and needs, and ensuring that we adapt our approach to new information as increased disclosure on ESG factors becomes available.
Andrew Pitt is Head of charities – London, Rathbones
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