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In Q4 2019, Schroders took over the asset management of two of our specialist funds. Meet Schroders’ Andy Simpson, manager of the Scottish Widows Ethical Fund, and Matthew Bennison, manager of the Scottish Widows Environmental Fund.
TO BEGIN OUR CONVERSATION, CAN YOU PLEASE GIVE US AN OVERVIEW OF YOUR APPROACH TO MANAGING THESE FUNDS?
Andy Simpson (AS): The Ethical Fund invests primarily in UK companies that demonstrate ethical attributes and practices. We carry out our own fundamental research on companies to identify attractive, long-term investments fitting the ethical criteria. We use a broad range of negative ethical screening criteria agreed with Scottish Widows to exclude undesirable investments, such as shares in companies which sell weapons or tobacco.
Matthew Bennison (MB): The Environmental Fund invests primarily in UK companies that show a commitment to the protection and preservation of the natural environment. The fund also uses negative screening criteria with an environmental focus, to exclude undesirable investments such as shares in companies whose practices may be harmful to the environment, such as fossil fuels and nuclear power, for example.
Within both of these funds, we will be reviewing the assets currently held in the portfolios with the aim of aligning them with Schroders’ views of individual companies and their long-term prospects, the outlook for the UK and global economies and valuations in the stock market.
REGARDING THE NOTION THAT ESG INVESTING IS A FAD, WE WOULD POINT OUT THAT TAKING INTO ACCOUNT MATERIAL ESG FACTORS IS SIMPLY GOOD FUND MANAGEMENT
BEYOND SCREENING FOR ENVIRONMENTAL AND ETHICAL FACTORS ARE VALUE AND QUALITY ALSO ASSESSED?
MB: ESG factors are a fundamental and integral part of our analysis of individual companies, together with our assessment of the quality of, and value inherent in, a business. Both of these factors also form key stock selection criteria. We are interested in the direction of travel in ESG factors, rather than just confining our exposure to ‘best in class’ only. The quality of a company’s management and board, how they are remunerated and the degree to which their interests are aligned with those of shareholders are very important considerations for us.
AS: If we do not believe a company is acting in a sustainable way and in the interests of long-term shareholders, we will engage with that company and do all we can as investors to try and bring about a change.
HOW DO YOU GO ABOUT ASSESSING ESG FACTORS?
AS: We have a number of proprietary ESG investment tools at our disposal which help us integrate a wide array of ESG considerations into our fundamental analysis.
One of the tools available to us scientifically combines measures of both the harm and the good companies can do. This gives us an aggregate measure by which we can quantify a firm’s social and environmental impact. The tool incorporates a wide range of measures such as wages, carbon emissions, tobacco sales, workplace stress and so on.
Another tool we can use provides us with a systematic framework for analysing a company’s relationship with its stakeholders (such as the environment, communities, employees and customers among others) and the sustainability of its business model, allowing us to identify market-wide trends and insights. This helps us identify material issues, particularly in advance of a meeting with a company’s management team. By identifying such issues, challenging management and conducting our own internal research, we are able to assess how well a company is positioned to deal with these ESG issues.
EACH OF THE TWO FUNDS HAS OUTPERFORMED THE LARGER UK EQUITY MARKET OVER THE PAST 5 YEARS. WHAT WOULD YOU SAY TO SCEPTICS WHO MIGHT SAY THE RETURNS AREN'T COMPARABLE WITH NON-ESG FUNDS?
MB: In recent years a number of studies have suggested that stocks with higher ESG ratings outperform their respective benchmarks (see the FT, Harvard Business Review, Morningstar). While it is, of course, important to note that such statistics are dependent on the nature of the ESG rating methodologies themselves and the time period in question, there is growing evidence that companies with higher ESG scores can produce better operational performance. Furthermore, a greater focus on ESG factors by investors generally means that companies with higher ESG ratings have the ability to command premium valuations, all else being equal. Consequently, stocks with higher ESG ratings have the potential to see better risk-adjusted returns over the long run.
Notable studies such as those by Morningstar or the meta-study by the University of Oxford and Arabesque Partners contend that the returns of ESG funds are comparable with non-ESG funds over the long term, although there can be large variances either way in the short- to medium-term due to the relative performance of excluded stocks or sectors.
Q: IS ESG INVESTING JUST “A FAD”?
AS: Not at all – taking into account material ESG factors is simply good fund management. Widening the lens through which we examine a company allows us to make better-informed decisions with the aim of delivering better outcomes for clients. We see the core tenets of ESG investing as examining a company’s corporate governance, understanding the way it interacts with key stakeholders and realising the effect its operations have on the environment.
MS: We believe that by considering ESG issues, and their associated risks and opportunities, investors will be better placed to see sustainable long-term results.
Manager of the Scottish Widows Ethical Fund
Manager of the Scottish Widows Environmental Fund