What about the other 29%?

I was recently invited to be part of a roundtable discussion organised by Charity Finance magazine and hosted by Newton Investment Management to discuss Newton’s 2018 Charity Investment Survey. Charity Finance published a subsequent article, summarising the discussion between myself, Jeremy Wells and Rob Stewart (Newton), Toby Belsom (ShareAction), Andy Nolan (University of Nottingham) and Jackie Turpin (Joseph Rowntree Charitable Trust). We discussed some of the findings in the report and more particularly talked about what sustainable investing means to us.

I have been reflecting on the discussion, both at the roundtable, and at the survey’s launch event which I attended some weeks previously.

71% of charities surveyed stated that ESG factors were important to them when considering the management of their investment portfolio. On the face of it, that is encouraging and demonstrates an increase of 9% from the 2017 survey. However, it begs the question – what about the other 29%?

Worryingly, 59% of charities assumed that ESG engagement was likely to have a negative effect on investment performance. I’m left puzzled as to why this perception exists when evidence suggests a very different reality.

Over the years, there have been a number of studies looking at the correlation between ESG factors and financial performance. Perhaps the most often cited is the 2015 report (by Friede, Busch and Bassen, published in the Journal of Sustainable Finance & Investment) aggregating evidence from more than 2,000 empirical studies. This work demonstrated that 90% of those studies found that an ESG investment focus did not negatively impact financial performance, with the majority of studies reporting a positive relationship.  A 2015 Morgan Stanley study (Sustainable Reality) found investing sustainably usually meets and often exceeds the performance of comparable traditional investments.

Given the compelling evidence, should ESG analysis not be an integral consideration in determining organisations in which to invest? Including ESG factors within credit analysis can enhance risk mitigation, and it makes sense that responsibly managed companies are best placed to achieve sustainable competitive advantage and provide strong long-term returns to shareholders.

And yet, less than a quarter of investment professionals consider extra-financial information frequently in their investment decisions (Tomorrow’s Investment Rules 2.0., EY 2015) and just 10% of global professionals receive formal training on how to consider ESG criteria in investment analysis (CFA Institute). Why is this and are asset managers doing clients a disservice by promoting and advising products that ignore ESG implications?

Financial and risk mitigation reasons alone should be enough to persuade charities and mission driven organisations that such investment strategies are worth pursuing. Putting these reasons to one side for a moment and thinking purely from a moral standpoint, should mission driven organisations also be ensuring that any investments held do not conflict with their values and objectives (at the very least)? Taking this one-step further, is it not incumbent upon charities to ensure that their investments complement their mission, and could investment strategies be another way for organisations to achieve their mission?

This is the approach we’ve taken at Access, investing using a “total impact” approach in accordance with our bull’s eye model. We are working, together with Rathbones and Rathbones Greenbank who manage our portfolio, to maximise social impact whilst at the same time have a portfolio that meets our financial needs.

Rathbones Greenbank recently published an excellent guide on socially responsible investing aimed at charity trustees, helping them think through what socially responsible investing means and what they might consider when setting a charity’s investment policy. If you’re part of the 29% not yet persuaded as to the importance of ESG factors, or even if you are and are keen to find out more, I’d encourage you to give it a read. Who knows, this time next year, we might see that 71% creeping ever closer to 100%!