Trustees have a great many responsibilities, one of which is to ensure that assets are used appropriately and in the best interests of the beneficiaries. When trustees deem it appropriate for funds to be invested, they should set out the parameters of that investment using a regularly updated Investment Policy Statement (IPS). However, as understanding and engagement of sustainable investing increases, what requirement is there on trustees to incorporate sustainable or ESG (Environmental, Social, Governance) factors into their IPS?
What responsibility does a trustee have to consider sustainable investments?
“Fiduciary and other duties exist to ensure that those who manage other people’s money act in the interests of beneficiaries. As a critical tool for addressing sustainability risks in portfolios and maximising overall long-term value, stewardship is considered to be part of investor fiduciary duties”
(The United Nations)
Governments and legislators around the world are being increasingly focused on sustainability and proposed legislation will require financial professionals to consider ESG factors for any investment. From October 2021, UK pension trustees will be required to consider the risks (and opportunities) associated with climate change on their investments.
Clearly there is a growing expectation to at least consider sustainable investing and investment professionals will be soliciting these conversations with trustees in the future, so trustees would be well advised to be ready to engage. In the STEP guide on ‘Family Dialogues on The Responsible Stewardship of Wealth’, trustees are encouraged to be a “force for good” and help facilitate conversations with families on the responsible stewardship of wealth.
There remains a general lack of clarity around sustainable investing, with concerns of greenwashing, uncertainty about the terms and indeed individuals themselves having different preferences. The STEP guide therefore suggests trustees should not turn a blind eye and instead encourage growing an understanding of ESG portfolios.
Is there a negative payoff between returns and the inclusion of ESG factors?
The primary goal of any wealth manager is to provide good risk adjusted returns. If we add a sustainable overlay to a portfolio, it is reasonable to ask whether what the returns downside might be – lower performance, higher volatility and higher fees? It is counter intuitive to believe that investing sustainably, for the benefit of people and the planet as well as profit will not have a financial impact. In short what is the cost for doing good?
This question has been asked since the genesis of modern sustainable investing in the late 1990’s. At that time sustainable, or as it was then called “ethical”, investing focused on the excluding investment in certain sin sectors including tobacco, gambling and arms but notably not fossil fuels. Excluding these highly profitable sectors led investors to be understandably concerned about performance lag.
Twenty-five years later, sustainable investing has become far more sophisticated focussing more on opportunity and less on exclusion. A combination of governmental awareness of the economic consequences of climate change, the associated shifts in policy and taxation coupled with increased public awareness are paving the way for companies providing solutions to the world’s increasingly prevalent sustainability issues. In 2020, Larry Fink (CEO of Blackrock, the world’s largest investment firm) said, “I believe we are on the edge of a fundamental reshaping of finance. The evidence on climate risk is compelling investors to reassess core assumptions about modern finance” but the data in support of sustainable investments goes back considerably further.
In September 2019, Morgan Stanley published a report analysing the returns of sustainable investments compared to their standard peers over a 25-year period. It showed no performance lag and less volatility. The report “Sustainable Reality” was then updated in September 2020 in the middle of the COVID-19 crisis, “They provide further evidence that funds incorporating environmental, social and governance (ESG) criteria can potentially provide financial returns in-line, if not better than traditional funds, and with less downside risk”, why?
Companies which embrace the idea of the triple bottom line, (people, planet and profit) tend to be more agile and can more easily adapt rapidly changing market conditions. Those that consider ESG factors are actively risk managing their businesses, which translates to a more robust business without affecting profit.
As we come out of the COVID crisis and the oil price increase and airlines become profitable again, we are seeing some recovery in these old “dirty value” sectors. However, sustainable investment is a multi-decade growth opportunity. It is most certainly not a fad, but a profitable way to participate in the transformation to a low carbon economy.
We have a huge responsibility as the managers of our client’s capital. We invest to provide for their future and to provide strong risk adjusted returns. Sustainable investing, by its very nature, looks to the future managing risk and seeking growth opportunities.
How can a trustee find the right investment solutions?
Partners Wealth Management are ideally and perhaps uniquely placed to provide regulated and independent professional advice service to trustees, whilst considering how to incorporate sustainable investing and how to appoint suitable investment managers.
Our Manager Select Service is designed to provide trustees with advice on which investment strategies and managers are best suited to meet the trusts objectives. Combined with The PWM Green Matrix, we can work with trustees to identify which investment solutions will be most suitable to incorporate the preferred level of sustainable investing engagement, whist still looking to optimise traditional considerations such as risk, return, and cost.
Richard Atherton
Partner, Head of Investment Research & Sustainable Investing
ratherton@partnerswealthmanagement.co.uk
020 7444 4037
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