Sustainable investment is built on trust

Trust is vital to socially responsible investing (SRI) and funds are now digging much deeper into potential investments, says Richard Essex.

This article is an extract from Richard Essex’s 2014 book, Invest, Feel Good and Make a Difference, which is available now on Amazon.

Trust is vital for the success of your investment and in encouraging you to invest more; and the fund manager is aware of this need to be trusted. They know that their personal success will be hugely influenced by this trust. Claudia Quiroz, fund manager for the Quilter Cheviot ‘Climate Assets Fund’, supports this view.

As well as ensuring capital growth on clients’ capital she states the following, “I additionally deal with very knowledgeable clients, making my job more exciting and more challenging. My clients understand the changes occurring in the market place and how a growing global population drives the demand for resources and the need to reduce carbon emissions. This means that I am much more accountable for the investment decisions that I make as my clients know very well the companies that are offering the right products and services to solve these sustainability problems.”

But this building of trust doesn’t just happen by accident. It is a result of, I believe, a more thorough research process than has been the case in the past. The genuine funds in this area are now combining traditional financial screening with wider social and environmental research.

As a result they are digging much deeper into the heart and head of potential companies, and this is having positive results. An example would be the Ecclesiastical Amity International Fund, which won the prestigious Lipper award in 2011 as the best global equity fund over five years.

A key element of the fund is that an in-house SRI team work alongside financial analyst colleagues. The SRI team will apply more rigid negative screens and then, more importantly, assess stocks on environmental, social and governance factors, looking particularly where companies are sustainability leaders in their sectors. The financial analysts will then look at colder financial data, such as earnings quality and cash flow. Both these activities tend to be primary screens, which will then be followed by company meetings.

The combination of the financial and SRI perspective provides the basis for more insightful research to be carried out at these meetings. This not only leads to more conviction buys but encourages greater engagement between the fund manager and the company executives.

A good indicator of this engagement can be seen by the number of votes cast by Ecclesiastical, as a stakeholder, on company resolutions. Between April and July 2012 they voted at 119 meetings. We now also see that this field encourages study, which is advancing the quality of fund research. In this regard there is also the work of Buntz and Nguyen from Pictet who are looking at a more refined model for a quality sustainable investment. It was only by being in the environmental space that they were able to see how additional financial factors can work hand in hand with ecological governance to produce a successful stock.

Not all SRI investments meet the required standard

This is not to say that the SRI area is completely bullet-proof from less trustworthy operations. From time to time advisers, like myself, will be pitched to by funds without the necessary credentials. These are often sold on the basis of some fantastic return but without the due diligence required to meet an SRI standard. Reassuringly these are often spotted by professional advisers.

Last year, for example, I was attending an Ethical Investment Association (EIA) meeting and we were being pitched to by a prospective scheme representative. The scheme being sold was a reforestation project somewhere in South America. One of the audience members asked the speaker whether the necessary care had been taken to respect bio-diversity when forests were being re-planted. For those of you unfamiliar with the term this is where the surrounding habitat, including plant and animal life is respected and preserved as best as possible. The pitcher had no idea how to respond. In fact it was obvious that he had no understanding of bio-diversity.

This is typical of many approaches where the pitchers completely misunderstand the motivation of their potential investors and try and lure people with financial returns only. Therefore, as a potential investor it’s always worth asking these questions, and if you are not sure speak to a professional SRI adviser.

So we can see that there is a real desire for fund managers to engender trust. But where is the source of all this trust. Ultimately it will depend upon the ethos of the company that you are investing in. It’s worth remembering of course that these companies are simply formed of people like you and I.

Richard Essex is an independent financial adviser with Grayside Financial Services, where he is a specialist for green and SRI advice. He is also on the steering committee with the Ethical Investment Association, a member of the UK Sustainable Investment and Finance Association (UKSIF) and the author of the 2014 book, Invest, Feel Good and Make a Difference.

Photo: bernadg via flickr

Further reading:

Sustainable investors can see where they’re investing

The sustainable investor is no longer marginal

You can get a healthy return by investing sustainably – and here’s proof

How sustainable investment has already changed the world

Breaking the eight myths of sustainable and responsible investment