The changing landscape of responsible investment
“The ‘environment’ is where we live; and ‘development’ is what we all do in attempting to improve our lot within the abode. The two are inseparable.” The Brundtland Commission report, 1987.
When I started my career as a financial advisor at the turn of the century, responsible investment was considered very niche. Few financial advisors would give much thought to discussing how a client’s personal values or ethical concerns could become part of their risk and return expectations.
I studied sustainable development at Liverpool University back in 1997 where I completed a course on the work of the Brundtland Commission, well known for coining the official definition of sustainability as, “Development which meets the needs of the present without compromising future generations”. This struck a chord with me and led me to look for financial solutions which align to this concept, but also offer strong financial performance.
Back in the late 1990s, opportunities for retail investors to integrate sustainable development into financial decision making were slim. Those funds that operated in responsible, or ethical, investment all focused on ‘screening’, i.e. avoiding “negative” investments such as tobacco, alcohol or other contentious industries. There was virtually no discussion of whether good management of environmental, social or governance (ESG) factors could contribute to positive outcomes such as better financial performance or an improved physical environment. It was also striking how few corporate investors, charities and other ‘ethical’ businesses, made the connection between their investment approach and charitable or social objectives.
Climate change and greenhouse gas emissions were rarely discussed in the context of investing either. They were regarded as rather obscure concepts, more closely associated with science and politics than the practical business of investing capital for productive purposes.
From niche to mainstream
Today, responsible investment – especially in the form of ESG integration - is very much part of the investment mainstream. Most of the world’s largest asset managers, the likes of Blackrock, Vanguard and UBS, all operate a suite of ESG orientated funds.
According to FE Analytics there are some 120 ethical and sustainable fund products available in the UK alone. All have subtly different approaches and styles of investment.
Distinguishing ‘ESG integration’ from impact investing
An important distinction shaping the development of responsible investing is the distinction between funds which invest in companies with good ESG performance but that make no significant contribution to addressing sustainability challenges, and funds made up of companies whose products and services are focused on addressing key sustainability issues, such as access to water, education and clean energy.
For example, the consumer staples giant Unilever has a huge product range and has played a leadership role on corporate ESG issues through its ‘Sustainable Living Plan’. Yet its core business in selling household products and packaged food does not address a sustainability challenge. Alphabet, owners of Google, are another good example of a company seen as being far from perfect but on the ‘right path’. Although criticised for a lack of transparency, especially in areas like data privacy, they are also recognised as the world’s largest corporate buyer of renewable power, with their commitments reaching 2.6 gigawatts (2,600 megawatts) of wind and solar energy. However, Google generates the overwhelming bulk of its revenues from paid for internet searches and other forms of advertising.
In contrast, the Austrian material sciences business Lenzing currentlyderives a growing and significant percentage of its revenues from products or services providing solutions to the world’s environmental and social challenges. For example, many of its fabrics and materials significantly reduce water consumption and are more durable, supporting the shift to greater energy and resource efficiency. Likewise, the US water heating and purification business AO Smith’s core businesses focuses on a range ofproducts and services geared to addressing a sustainability challenge
Siemens Gamesa would be another example of a “pure play” (excuse the industry term - but it basically means committed) sustainability driven company. Siemens Gamesa is responsible for 90 GW of global onshore and offshore wind energy, helping save an estimated 233 million tons of Co2 per annum. They are also committed to being carbon neutral by 2025.
ESG v impact
As responsible investment comes of age, this ESG versus impact/sustainability focused investing is becoming a crucial distinction for investors to understand. It is vital that products focused on ‘ESG integration’ are evaluated separately from those having direct impact.
Nutmeg’s recent launch of a sustainability branded range of investments employs an ESG focused approach and includes companies like Unilever – a firm that demonstrates excellent corporate citizenship, but still one that produces packaged foods that clearly won’t be contributing towards a healthier, more sustainable society. In contrast, the WHEB Sustainability Fund is focused on companies explicitly providing solutions to some of the most serious environmental and social challenges facing the world.
John Ditchfield is head of Responsible Investment & Wealth Management Adviser at Helm Godfrey Partners Ltd
Impact investments include companies producing offshore wind energy such as Siemens Gamesa
 The Brundtland Commission report “Our Common Future” October 1987
 Our Common Future UN Report