This is part 2 in our series, read part 1 of Introduction To Sustainable & Impact Investing
The growing trend and availability of sustainable and impact investment options is allowing families to engage with their wealth like never before. We believe that engagement at all stages of the wealth management process is the key to success – families who wish to reflect their values and principles in their approach to investment will remain engaged and feel in control of their wealth; advisers who engage with their managers will ensure that financial results and societal and environmental impact are in line with the objectives for the wealth; managers who engage with the companies they invest in will help deliver better outcomes for shareholders, society and the environment.
Performance analysis
Improved data from companies, especially on ESG (Environmental Social & Governance) factors, allows investors to include more objective and up-to-date data about these elements. The availability of data improves investors capacity to challenge companies on long term sustainability issues. However, to embrace the transition from transactional to relational, ESG screening cannot replace in-depth company research. We believe that a manager investing in companies with strong businesses that have a positive impact on society and the environment is the way to achieve long term outperformance. An Arabesque/Oxford study confirms this as they found that 80% of studies show that stock price performance of companies is positively influenced by ESG issues. By proxy, the study found that if a manager is investing in these companies, their fund will perform well in the long term. In a meta-study conducted by G. Friede et al., through a second-level review of 60 review studies on the ESG-CFP (corporate financial performance), they were able to combine more than 3,700 study results from more than 2,200 unique primary studies. Based on this sample, they too found clear evidence for the business case for ESG investing. The graphs below show the amount of positive ESG-CFP correlations across main asset classes, regions and ESG categories, demonstrating that this relationship is largely positive.
The relationship between ESG and Corporate Financial Performance in main asset classes
Source: G. Friede et al.
The relationship between ESG and Corporate Financial Performance in various regions
Source: G. Friede et al.
The relationship between ESG and Corporate Financial Performance across E, S and G
Source: G. Friede et al.
Wren’s quantitative research suggests that global equity funds that are managed with an ESG focus do not underperform “traditional” global equity funds. In fact, ESG funds exhibited better downside protection during the global financial crisis of 07/08. There is, however, a large dispersion of returns between ESG managers due to the nascent nature of sustainable investing and ratings methodologies.
Empirical evidence suggests that sustainable companies create value and mitigate risk, yet this is not consistently feeding through into manager performances. We believe therein lies the opportunity. Engaging with fund managers to conduct the appropriate due diligence and make responsible investment decisions over the long-term will mitigate risk and deliver better returns.
SDGs and investable themes
The Sustainable Development Goals (SDGs), set out by the United Nations, are a collection of 17 global goals to be achieved by 2030. Many investors and companies already use these goals to easily classify which issues they are trying to address. While the UN estimates that it will cost $5-7 trillion to actually achieve the goals, a recent GIIN (Global Impact Investing Network) survey conducted each year suggests that 42% of impact investors are already using the SDGs as a tool or indicator set in their impact measurement. It is of course not possible to impact every SDG with every investment, and different industries have their own sustainability issues which can be addressed through financially material selections. Different investments will focus on different financially material issues and in understanding this, investors will find it easier to report on sustainability matters to their clients.
We have simplified the SDGs by categorising them into four broad trends. These can be seen in the table below:
Providers and advisers
Wren has come across a large and growing number of companies and funds that operate in the sustainable investing space. To stay on top of it all, we have created a database of the sustainable investing universe; comprised of financial managers, ESG and impact data providers, professional bodies, consultants, tech providers, thought leaders and NGOs – which expands with our ongoing discovery and interaction with the sustainable investing space.
An essential requirement for continued growth in sustainable investing practices is determining a level playing field for what constitutes ‘sustainable’. Without this, investment products are difficult to compare, leading to confusion among investors. Worse, the lack of definition can lead to risk of ‘ESG washing’, whereby products are promoted to investors that might have exaggerated ESG credentials. Many companies offer ‘ESG labels’ however there are a diverse range of entry requirements and assessment parameters between labels, so it is the responsibility of the investor to always conduct more in-depth research.
How we think about it
We have tried to discover sustainable investing for ourselves to form our own idea of what it means to us. At the same time, we realise the importance of unifying the understanding of taxonomy, terminology and standards across the financial services industry in order to create a reliable benchmark to work with.
We believe it is important for sustainable or ESG investing not to be an add-on element to a business but an integrated process that becomes a seamless part of an existing infrastructure. It is important to begin to move away from the transactional to the relational, a shift in focus which will ultimately lead to higher quality and more responsible investment management. This means a higher level of engagement between companies and shareholders, and fund managers and investors.
To coincide with what we have learned, we have assimilated a number of sustainable investment beliefs into our already existing investment philosophies:
- Sustainable investment is an enrichment of the investment approach
- Committed and active stewardship with managers is a crucial part of wealth management
- True social and environmental impact is best achieved in primary and private markets and through philanthropy
Sustainable and Impact investing at Wren Investment Office
Wren Investment Office benefits from substantial resources and an international perspective as a result of its formal alliance with WE Family Offices in the US and MdF Family Partners in Europe. The alliance advises on over £12bn of client assets. Our clients have chosen to work with us because we have been able to demonstrate breadth and depth of investment resource, experience and knowledge. The alliance advises across all asset classes for clients based in the UK, US, Europe, Latin America and Africa and oversee over 150 investment managers. At the core of our alliance is a jointly agreed set of investment principles which form the foundation of our combined investment process.
We have reviewed over 150 ESG and impact managers across all asset classes – cash, social impact bonds, green bonds, credit and high yield, equities, ETFs, real assets, private equity and direct opportunities over the past few years and our clients currently have investments with 25-30 of them.
We are seeing growing interest for sustainable and impact, or values-aligned, investing across our client base, especially from younger generations. This is an important part of our current business and we expect it will become increasingly relevant for all our clients. As a result, we have immersed ourselves in this discovery process and are very well positioned to understand the needs of our clients looking to align their values with their portfolio, but also to share this knowledge with others to promote the essence of sustainable investing.
Wren Investment Office
February 2020
