Investing responsibly has to be more than putting lipstick on pigs

14 Feb, 2020 12:42
source: investmentweek

Author: James Sullivan, managing director of MitonOptimal

It remains a subjective topic. However, I have seen numerous SRI or ESG funds that have exposure to stocks that one would rightly question what they positively contribute to society.

What is at the forefront of the thinking when the manager compiles the portfolio? I have no doubt that in some cases it is more akin to :’This stock is great, let’s justify its inclusion’.

Paul Warner, head of our ethical and SRI mandates, has been investing responsibly for close to quarter of a century. His contribution to our investment committee has cultivated a more responsible way of investing, helping cross pollinate conventional mandates.

We recognise we will not always get it spot on, but we want genuinely responsible and sustainable investments to be embedded within all our products and solutions not because of popular consensus, but on merit.

The same merits that any other investment is included. The yardstick does not change to accommodate.

We recently referred to the shift towards responsible investing as ‘structural’. Sentiment towards investment themes can blow hot and cold, but there is reason to believe responsible investing has great longevity.

What makes the move towards responsible investing attractive is centred on the growing maturity of the investment universe, developing itself beyond a luxury investment or a niche offering for green party members.

We view responsible investing as less of an addendum when constructing our portfolios, and more of an investment overlay, to be placed alongside one’s traditional asset allocation as we reach for growth and sustainability.

The issues associated with climate change have captured the attention of many. Governments and big business have been forced to self-reflect, alongside those setting the asset allocation at intuitional investment houses.

The stance adopted by larger corporates has arguably been forced upon them by the emergence of a new generation of investor, and in turn, younger companies developing products focused specifically on issues related to climate change and environmentally sensitive topics. From clean energy to water purification, this is innovation being led by necessity and demand.

Companies that fail to embrace sustainable, responsible or similarly appropriate cultures are likely to adopt a lower valuation multiple than those that do.

Value or growth is old money. It is fast becoming responsible or not.

The flow of money will decide who wins. It is a simple matter of demand outstripping supply.

Within our multi-asset funds, we have several positions in this space that have a focus on clean energy and real assets. One such investment that ticks a lot of boxes is that of Gresham House (GHE).

GHE is a specialist asset management company with emphasis placed on real assets, notably forestry and new energy (wind, solar and battery storage).

From something close to a standing start, assets under management hit £2.5bn last summer. Revenues touched £15m and the benefits of operational gearing feeding through to the bottom line permitted the introduction of a maiden dividend.

There is the temptation to take profits here, but the demand for ‘real assets’ is increasing, and Gresham House is well placed to continue its upward trajectory.

What excites us is not what has been achieved to date, but what we know can be achieved looking forward.

We recognise there is room for improvement, but we have made meaningful strides. Responsible investing and our asset allocation sit comfortably together.

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