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Responsible investment: straining the alphabet soup

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Lisa Beauvilian

One in five professionally managed dollars in the US is now invested with environmental, social and governance (ESG) factors in mind, according to the latest data from the US SIF Foundation. Its European counterpart Eurosif finds that more than half of assets in Europe can be categorised as “sustainable and responsible investments” (SRI). Investors managing more than $60 trillion, perhaps half of the global pool of managed assets, have signed up to the UN-backed Principles for Responsible Investment (PRI).

Three impressive statistics – and three different acronyms, covering a wide range of investment approaches, and causing considerable confusion in the marketplace.

So how should investors make sense of the responsible investment alphabet soup?

Part of the problem is that many of the acronyms and expressions used lack an agreed definition, and are often used casually or interchangeably. But sloshing within the soup are terms and approaches that have more precise meanings, and which can be used to understand exactly how a self-described responsible or ESG investor approaches the business of investing.

As a starting point, SRI, responsible investment, and ESG investing can be considered umbrella terms that cover a multitude of approaches. Put simply, they involve some consideration of environmental, social, ethical and/or governance issues in the selection and management of investments and typically, they imply a relatively long-term investment horizon.

As is clear from the above, ethical investment is a sub-set of responsible investment. The approach – avoiding companies whose activities conflict with an investor’s values – was borne out of campaigns against apartheid in South Africa in the 1980s, and several religious groups also adopted a similar approach and pioneered the modern SRI industry. For that reason, and because many retail SRI products still take an ethical investment approach, many people continue to conflate responsible investment or SRI with ethical investment.

However, ethical investing is very much a sub-set of today’s responsible investment world. Ethics are subjective, and the investment approach – excluding companies and often entire industry sectors, such as tobacco, gambling and defence, adds to a portfolio’s volatility and risks underperformance compared with the market as a whole. Ethical investors are commonly understood to be prepared to accept this risk of underperformance as a price worth paying to invest in line with their values.

ESG integration

For most responsible investors, however, the starting point is that an understanding of ESG issues can help improve investment returns, by identifying risks and capturing opportunities that might be overlooked by the wider market.

Such an approach can be characterised as ESG integration (as opposed to the somewhat vaguer ‘ESG investing’). It involves investors integrating a rigorous assessment of ESG factors with their existing financial analysis, with a view to generating investment outperformance.

This integration is the first of the six principles to which PRI signatories commit. There is, of course, a range of options as to how that ESG analysis is used to inform investment decisions.

One approach is best-in-class investing, where ESG scores are used to identify the top ESG performers in each industry sector. This has the advantage of allowing managers to construct portfolios that mirror the mix of industry sectors found in the wider market, preventing too much divergence in returns from market benchmarks. The downside, however, is that best-in-class investing tends to focus on how a company is run, ignoring what it produces. For example a well-run producer of gas guzzling SUV vehicles might score more highly than a manufacturer of hybrid or electric vehicles.

Another danger with ESG integration is that it can pay insufficient attention to the ‘materiality’ of various ESG factors. Consumer protection issues are much more important than climate change for the performance of a retail bank, for example, while strong anti-bribery policies are a higher priority for a pharmaceutical firm than energy efficiency. Failure to control for materiality can lead to perverse outcomes.

Meanwhile, larger companies tend to have more developed ESG policies and processes, allowing them to score more highly than their actual performance might suggest. This has led some to question the usefulness of ESG fund ratings for companies (and investment funds, for that matter) offered by a growing number of service providers.

Incorporating ESG risks and opportunities

At Impax we use ESG analysis as one step of our rigorous investment process to identify the providers of solutions to the pressing environmental problems we face as a result of population growth, changing demographics and increasing consumption. This approach could be categorised as thematic ESG investing, and it can be particularly successful when applied to under-researched mid- and small-cap companies.

Impact investing

There is also another responsible investment strategy – impact investing that is gaining traction as an allocation style, particularly within the wealth market, as families and younger inheritors of wealth seek to align their investments with their values.  We have three strategies across listed equities, as well as renewable power generation and sustainable property in real assets which tend to appeal to this growing audience. Our investment process directs capital towards companies and/or real assets with quantifiable environmental benefits, in addition to financial returns.

Listed equity products have been slow to adopt a sophisticated approach to positive impact measurement and typically look only at ESG risk mitigation, whether through negative screening or incorporating aspects of ESG strategies. Impax is one of the first take the language and quantitative evidence of positive impact investing to a listed equity strategy. The first step in our investment process is to establish that a company generates at least 20 per cent of its revenues from environmental market exposure (on average across the portfolio this is currently around 60 to 80 per cent).  It is this pure play approach that delivers a truly differentiated portfolio and enables measurement of the positive environmental impact. Such an assessment allows us to demonstrate to our investors the real-world positive environmental outcomes of our investment decisions, and track progress over time.

[We also see a growing number of investors are considering measuring impact, encouraged by the launch in 2015 of the UN Sustainable Development Goals (SDGs), 17 objectives to tackle global social, environmental and development challenges. However, because the SDGs are broad in scope – one metric is for job creation, for example – there is a risk that some investors will seek to claim that business-as-usual investing has helped deliver against the SDGs. We think that such claims should be met with scepticism: intention is as important as outcome for investors claiming to be impact investors.]

In conclusion

So much for defining our terms. What does all this mean for investment performance? For ethical investing, the calculation is clear: restricting the size of the investible universe increases the volatility of returns compared with the broader market. For ESG integration, however, our experience and the emerging academic consensus is that investing responsibly need not sacrifice returns and, in the majority of cases, and particularly over the longer term, integrating ESG factors provides investors with additional information and insight, helping them to outperform.

 

Written By Lisa Beauvilian, Head of Sustainability & ESG, Director 

Lisa joined Impax in 2010 and is responsible for environmental policy and legislation investment research and non-financial or Environment, Social and Governance (ESG) analysis.

She started working in the financial industry in 1999 and previously worked as Executive Director in the Investment Management Division of Goldman Sachs International. Lisa has also worked as an independent consultant focusing on environmental policy research and analysis. She is a Trustee at the International Institute of Environment and Development (“IIED”). Lisa has an MSc in Environment and Development from the London School of Economics and an MSc in Finance from the Hanken School of Economics in Finland.

Economy

How Going Green Can Save A Company Money

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going green can save company money
Shutterstock Licensed Photot - By GOLFX

What is going green?

Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.

The first step in going green

There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.

Making needed changes within the company

After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.

Reducing the common paper waste

paper waste

Shutterstock Licensed Photo – By Yury Zap

Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.

Make money by spreading the word

Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.

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Energy

5 Easy Things You Can Do to Make Your Home More Sustainable

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sustainable homes
Shutterstock Licensed Photot - By Diyana Dimitrova

Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.

1. Weather stripping

If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.

Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.

Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.

2. Programmable thermostats

Programmable thermostats

Shutterstock Licensed Photo – By Olivier Le Moal

Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.

Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!

3. Low-flow water hardware

With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.

Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.

Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.

4. Energy efficient light bulbs

An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.

New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.

5. Installing solar panels

Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.

Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.

From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!

These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.

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