Environmental, social and governance investment issues are more important to investors than ever. Schroders’ Head of Sustainability Strategy, Hannah Simons, explains the evolution of the company’s approach and how it is using technology to provide transparency around the impact of investments across its entire range of products and solutions.
One of the biggest investment stories of 2020 has been the huge inflows into sustainable funds, breaking records and confirming that environmental, social and governance (ESG) investing is not a passing trend.
Data from Morningstar for the second quarter of the year showed that the amount of new money flowing into ESG strategies hit $71.1 billion globally, pushing total assets under management beyond $1 trillion.
Schroders’ latest annual Global Investor Survey backs up this trend. Some 47% of the 23,000 retail investors polled said they frequently invested in sustainable funds rather than products that did not consider sustainability factors. This was up from 42% in the 2018 survey.
More than three-quarters (77%) of investors said they would not invest in something that was against their personal beliefs, even if the returns on offer were potentially higher.
When asked why they were attracted to sustainable funds, 47% cited the environmental impact, while 42% said they thought such products were more likely to offer higher returns.
It is this impact aspect that Schroders has sought to embed across its business in recent years. The sustainability team, led by Andy Howard, has been working to develop the company’s impact measurement tools and establish this aspect as the ‘third pillar’ of asset management, alongside risk management and financial returns.
As ESG investing has evolved, so have investors’ expectations. Integrating ESG factors into investment processes is no longer enough to set an asset manager apart from the rest – increasingly the focus is on the non-financial impacts of their investment decisions.
A poll of institutional investors conducted by Schroders this year found that there was a growing focus on expressing ESG intentions through ‘best in class’ approaches and ‘active company engagement’, and much less on negative screening strategies.
“Clients increasingly believe that engagement is a positive way to reinforce sustainability and drive change,” says Simons. “We have a long-held belief around the power of engagement, and our ability to gain really good insights through the engagements we have with companies around how they are navigating sustainability risks and opportunities.”
Assessing the real-world impact of investments requires a different approach than traditional financial performance metrics. Schroders has developed a platform of tools called impactIQ, combining a range of proprietary technologies driven by traditional and non-traditional data.
The impactIQ platform, accessible to all Schroders’ portfolio managers and analysts, is designed to factor sustainability into the decisions made on behalf of clients, channelling capital towards more sustainable businesses with the aim of creating tangible benefits for people and the planet over time.
“The tools we have developed help quantify sustainability risks and impacts, so that, from an investment perspective, we can understand the extent to which sustainability risks and opportunities may impact companies that we want to invest in,” Simons explains. “These tools enrich our research process and enable our investors to ask questions of how a company is managing its business in light of sustainability.”
Portfolio managers and analysts use the data generated by impactIQ’s tools to interact more closely with companies on how they are managing sustainability challenges. Static data, such as a carbon footprint, is only a snapshot – investors use this to engage with company management around how they intend to manage that carbon footprint through time.
The impactIQ platform’s range of tools includes:
• SustainEx is an analysis tool developed by Schroders 18 months ago which leverages the wealth of academic research into the societal costs and benefits of various corporate activities. For example, the carbon footprint of a company is a cost to society, but the tax it pays is a benefit.
Schroders uses more than 400 academic studies and metrics to estimate the costs and benefits for over 13,000 companies.
• Carbon VaR (Value at Risk) measures the impact of rising carbon costs on a company’s profitability. It looks at a company’s own carbon emissions and those of its suppliers and calculates the risk that higher carbon prices places on the demand for its products and services if these higher costs are passed onto its customers.
This allows analysts and portfolio managers to analyse the carbon risks embedded in a company and how they might cope if regulation results in higher carbon pricing.
• ThemeX allows Schroders’ investment teams to map companies’ contributions to the United Nations Sustainable Development Goals (SDGs) based on the impacts of their products and services.
The SDGs, launched in 2015, have fast become a template for measuring the positive impacts of investment decisions. Schroders has ensured that its tools and communications clearly allow clients to map their portfolios onto the SDGs, as well as any other broad or specific impact targets they may have.
“Increasingly, clients are using the SDGs as a common language,” Simons says. “The beauty of creating all these tools ourselves means that we have the ability to look through different lenses so we can map to the individual SDG goals or to ESG themes.”
While Schroders’ portfolio management teams are acutely aware of the impact their allocations have, this is distinct from impact investing, which is a far narrower subset of sustainable investing. Schroders has a close relationship with BlueOrchard – a leader in impact investing – through a majority stake acquired last year. The company believes BlueOrchard’s strategies are key to delivering sustainable solutions to clients.
impactIQ might be up and running and fully embedded in the company’s investment processes and business model, but Schroders is not resting on its laurels. As Simons explains, the sustainability team intends to make full use of its data and analysis tools in the months and years ahead.
The team has already published detailed studies of the impact of plastics on the planet, and how the investment industry can influence plastic use and production. Its climate change quarterly monitor has become a key barometer of how the world is progressing towards the target of keeping the average global temperature rise below 1.5°C above pre-industrial levels.
“One engagement programme we are about to embark on is looking at board-level ethnic diversity,” Simons says. “We’ve recognised for many years that diverse boards bring immense potential to companies. Our initial work has focused on the gender lens, and we continue to pursue those engagements, but we’re also now looking at engagement around representation on boards for people from a BAME background.”
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