Simon Howard, chief executive of the UK Sustainable Investment and Finance Association (UKSIF), talks to Blue & Green Tomorrow about the key investment risks – and opportunities – presented by sustainability challenges.
This article originally appeared in Blue & Green Tomorrow’s Guide to Sustainable Investment 2014.
What is UKSIF and what does it do?
UKSIF is a membership association for organisations and practitioners leading the way for sustainable investment and finance in the UK. We have around 250 members, ranging from financial advisers, to fund managers, to service providers, to retail banks, to investment banks. What unites us as a world-leading cluster is a desire to grow the market for sustainable investment and improve knowledge, techniques and conditions to ensure the UK stays ahead of the curve.
Where does the momentum currently lie in the sustainable investment world?
I think there is growth across a wide range of investment approaches. The negative screening approach is still widely practiced and still attractive to many people – in particular with the ethical side because it is quite easy to express your ethics by using screening. But there is a wide variety of approaches in use in the UK.
There are people who seek to identify areas of growth driven by sustainability themes and they look to invest in companies of all types exposed to those; and there are also people who are just making sustainability considerations integral to all of their investment processes. So fixed income investments, property investments and equity investments will all be considered, in part at least, by their sustainability impacts – the risks and opportunities offered to them by a wide range of environmental, social and governance (ESG) issues. There is a wide range of techniques practiced by banks and fund managers and we support and encourage them all.
Is sustainability a mainstream investment consideration?
I don’t think you could generalise and say it is across the board. I think it is increasingly becoming ‘mainstream’ in the sense that a fund manager who doesn’t consider these elements is ignoring real risks. If you just look at the downside of an investment, if you’re not considering how the value might be impacted by public perception of a company and its ethics; if you don’t consider the liabilities it may incur if a company pollutes; if you don’t consider the risks to business models if companies rely on scarce resources, then you’re ignoring some very important risk factors.
On the other hand, if you don’t consider how a company may be well positioned to benefit from the opportunities – from developing new sources of supply to replace outdated, unsustainable, ones and so forth – you’re probably not doing your job fully. But whether one can say this thinking is now really mainstream and now really core across all investment is probably going a bit too far. It’s increasing, but it’s not yet core everywhere.
What are the real risks for an investor who doesn’t factor in sustainability issues?
I think the risks are potentially huge in scope. They affect almost every part of a company’s operations. Let’s just look at the very pragmatic: if sea levels rise and if flooding becomes a problem, then no doubt some economically active buildings are built in the wrong place. So at a very simple level, where is your factory and is it going to get flooded? Will the rail line servicing you be cut off?
There are climate change effects, and that’s before you consider your existing sources of supply in the food business for instance. If the crops you use to make your product are challenged by drought or excessive rain or increases in temperature, you’re cut off at the knees if your suppliers can’t give you what you need. There is an almost infinite variety of risks to which companies are exposed. In IT, which presents itself as a relatively clean industry with young motivated people, if you’re reliant on rare earth metals – the production of which pollutes or damage the prospects for indigenous people – you’ve got an issue there, because that won’t be very well regarded by your customers.
I think pretty much every economic enterprise needs to consider these risks. It’s a pity that we do have to focus on the risks; we don’t really have the opportunities yet that are readily investable, but hopefully in the coming years, we’ll be able to offer more attractive investment opportunities that let people invest in the benefits of sustainability.
There are many myths about sustainable investment, usually relating to performance, risk and volatility. Do they have weight nowadays?
It’s very hard to say anything simple, because depending on the universe you choose to include as being your ethical or sustainable funds, their performance overall depends on which funds you include and which you don’t include. Al investment styles – be it large-cap, small-cap, yield or return on capital – have times when they do well and times when they do badly.
I think there is quite good evidence that investing the right way, as I would turn it, in certainly the medium and long-term need not damage your returns and need not be more volatile. There are academic studies that show that, but people will always be able to point to a period where the funds they define as ethical or sustainable have done badly. The honest, blunt answer is that performance is driven by what you choose to measure, and we should be aware of generalisations. I certainly think that a case that says sustainable funds do badly is very hard to maintain now.
What would define success for UKSIF in 2014?
I want UKSIF to be increasingly regarded as a relevant organisation – by which I mean the work we do is for the benefit of members and is recognised as being for the benefit of members. I’d like, in particular, our public policy work to be recognised – that we are pushing for the right kind of things to regulators and to politicians. I want people to recognise that we’re saying the right thing, trying hard and achieving. It’s a very difficult question to answer on a 12-month view, but I’d like people to think there’s a buzz about us and that we’re pointing in the right direction.
What would define success for the sustainable investment industry?
Again, that’s a very wide question. I think that if it’s recognised that the finance sector – the banks, the fund managers, the financial advisers – is developing the expertise to cope with and adapt to the sustainability challenges that are almost certainly coming our way, then I think that would be a very good outcome. If we can tell more people that they can get advice and get their funds invested in a way which can cope with sustainability challenges, I think that will offer valuable reassurance.
Any final thoughts for our readers?
How are the risks being managed? There are clear risks, which we can call sustainability risks. Anyone who is sceptical has to be happy that someone is considering the risks to which they’re exposed, and happy that someone is managing them. That’s the kind of base argument to put to the sceptics. If things continue to get worse, how are your funds being managed?
Simon Howard is chief executive of the UK Sustainable Investment and Finance Association (UKSIF).