As an advisory brokerage based across mainland Europe, we have an obligation under the EU Sustainable Finance Disclosure Regulation [SFDR] to inform our clients and prospective clients of the ways in which we include responsible investing in our advice process.
These regulations were developed to drive sustainable investment so we, as a global community, can succeed in meeting today’s challenges of combatting climate change, achieving de-carbonisation, improving social equality, and creating a resource efficient circular economy. It is hoped that Europe can lead the way through better transparency of the practices of financial market participants, such as fund managers, pension funds and financial advisers.
At Spectrum we believe that we have an important part to play in trying to achieve these vital targets, both as an advisory business and as individuals; we agree that there is no Planet B…. but responsible investing, and therefore responsible investment advice, is not just linked to climate change, though this is probably one of the most pressing of the global issues. Social factors are also a major consideration when discussing responsible investing.
Though we feel strongly about promoting the options for responsible investing, we also believe that all our clients have their own choice when it comes how to allocate their capital. For this reason, we integrate responsible investment discussions into our advice process but do not push our own views onto our clients.
The process will include questions about how our clients consider the environmental and social impacts of investing, how the risks involved may affect their portfolios, and where our clients sit on the Responsible Investment Spectrum.
These discussions will allow us to better define the depth of responsible investment criteria to be considered when advising on portfolio construction.
We will include reporting data on how the investment solutions we recommend integrate various ‘sustainable’ factors into the investment management process.
What is responsible investing?
“Building wealth today without borrowing from tomorrow”.
We believe this term is a good catch all for the huge range of investment solutions that are now available. Responsible investing should, at its heart, be about investing in companies but through a lens of social, environmental, or moral considerations, along with pure financial considerations.
There is a mass of taxonomy and terminology around this area of investing including:
- Socially conscious
- ESG (Environmental, Social and Governance)
- Socially responsible investing (SRI)
The amount of jargon and abbreviations will get worse before it gets better, so we are here to guide you through this as much as we can.
We have decided, until more clarity is provided by market participants and regulators, to use the following “Responsible Investing Spectrum” as a guideline for discussions with clients. This is partly based on the UK Investment Association Responsible Investment Framework report.
We prefer this term to ‘irresponsible’ which has negative connotations. Someone might feel completely neutral on the whole issue and so should never be tarred as some sort of immoral person.
ESG Integration – Environmental, Social and Governance
Environmental refers to a company’s use of and impact on ‘natural capital’ and could include how the business impacts (or is impacted by) climate change, what resources it produces or uses and whether it contributes to pollution or waste.
Social factors include how the company interacts with customers, staff and suppliers and also with the communities in which it operates. This can lead to reputational risk and over regulation but can also allow investment opportunities into micro-finance or low-cost housing solutions, for example.
Governance is how a company is managed, or mismanaged, and would include board structure, equality, accountability and remuneration.
Stewardship primarily relates to how a fund manager would engage with the companies into which he or she is investing client capital. Voting on shareholder decisions, challenging the board over management and helping companies improve their overall sustainability are an important part of a fund manager role.
NOTE: It is important to understand that a general ESG integrated fund solution may NOT actively exclude any certain sectors or companies, like oil for example, but will refer to the risk of this investment.
Sustainability Focus and Exclusions
Exclusions – Often known as “negative screening”, the main approach of ethical funds.
This prohibits the manager from investing in companies or even other funds and the screen can be at company level, business sector, revenue stream or even jurisdiction level.
Sustainability Focus – This focuses on:
1. What a company does, i.e. do they provide solutions to the sustainability issues we have such as reducing carbon dioxide or waste management?
2. How a company works, i.e. have they done all they can to reduce their own climate impact?
Here we have the intention to generate positive, measurable social and environmental impact alongside a financial return.
The intention of impact investing is what makes it different to ESG integrated solutions – here the company’s purpose is aligned with its products and/or services and it actively reports and measures the impact it has on society and the environment.
A fund investing as an impact fund should provide an Impact Report to its investors showing explicitly what positive change came from their capital.
Problems with responsible investing
Greenwashing is a way for a company give a false impression, misleading statements or claims that its products or governance is more environmentally or socially friendly than they actually are. This can include investment funds with ESG or Sustainability in their name, but which are actually not intentionally selecting companies through a sustainability lens.
Hopefully, better taxonomy, simpler reporting requirements and regulation will lead to greater transparency and less greenwashing.
Measurement, taxonomy and ratings
It is clear to see that there are many different factors to look at when considering the whole gamut of responsible investing; evaluating ESG risks and performance is a complicated task.
There is no single concept for measuring how ‘green’ a fund or portfolio is… and until there is we have to approach this with a flexible process while sticking to the concepts our clients are committed to, i.e. does this investment build my wealth without borrowing from the future?
The UN Sustainable Development Goals may well end up as a globally recognised approach to reporting on the ‘sustainability’ of a company or fund, but we are some way from this at the moment.
In Europe, all funds must now report under EU SFDR as Article 6 (let’s call this Agnostic), Article 8 (approximates to ESG Integration) or Article 9 (Sustainable or Impact) and we will refer to this data where available.
For more information about any of these issues or to discuss Responsible Investing with any of our advisers please don’t hesitate to contact us.
Investment Association Responsible Investment Framework report
UN SDG Programme