Image by Matteo Jorjoson

August

INVESTMENT
UPDATE

Here we look at the latest factors affecting the investment market across the globe.

We'd like to thank our partners at Charles Stanley for their help in pulling this information together.

Last month the pan-European Stoxx 600 index hit a record high, but equities weakened over the week as concerns over inflation and the spread of the Delta variant of the Covid-19 virus remained somewhat of a drag on sentiment.

Covid-19

The 19th of July saw Freedom Day arrive when the UK lifted most of the restrictions that were introduced to stop the spread of the Covid-19 virus following the rapid rollout of its vaccination programme. However not everyone is going all in. Although the legal mandate to wear a mask will be dropped, some retailers such as Sainsbury's, Tesco and Waterstones will “encourage” people to wear a face-covering on their premises. Investment bank Goldman Sachs will also require mask-wearing in its offices.

 

Elsewhere a group of major travel businesses including Ryanair,  IAG-owned British Airways, travel business Tui and Manchester Airports Group has launched legal action against the government over its travel restrictions. They are asking for significantly more transparency over how the government takes decisions on Covid-19 travel rules. In particular, they want to know how the government assesses the threat in destination countries. Airline shares were hit once more last week after the UK government announced that the Balearic Islands of Majorca, Menorca and Ibiza would be added back onto its “amber list” of travel destinations.

WHAT IS SOCIALLY RESPONSIBLE INVESTING?

An approach to managing assets that sees investors include environmental, social and governance factors as well as financial returns in their decisions about what to invest in. It aims to combine better risk management with improved portfolio returns, and to reflect investor and beneficiary values in an investment strategy. It complements traditional financial analysis and portfolio construction techniques. This is often used as an umbrella term that encompasses various approaches.

WHAT APPROACHES ARE THERE TO SOCIALLY RESPONSIBLE INVESTING?

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WHAT IS ETHICAL INVESTING?

Ethical investing focusses on aligning the ethical values of an investor with the investments within their portfolios. An ethical investment is mainly guided by ethical codes, religious beliefs or personal values and is often carried out using exclusionary screening.  Examples of possible exclusions include areas that are deemed to be harmful to society and the environment, such as weapons, gambling, tobacco and coal mining.

WHAT IS NEGATIVE SCREENING?

Avoiding investing in companies engaged in what are perceived to be harmful activities, such as tobacco, gambling or manufacturing weapons.

WHAT IS POSITIVE SCREENING?

Rather than avoiding investment in certain areas, each sector is assessed for opportunities to invest in companies which focus on specific ESG themes or exhibit stronger ESG characteristics than their industry peer group. This can be implemented through thematic investing or best-in-class.

WHAT IS ESG?

Environmental, social and governance (ESG) factors are non-financial considerations that inform investment decisions based on an assessment of the risks these factors pose to investments. ESG is not only about what a company manufactures or sells, but also how it goes about it. 

 

ESG integration includes the consideration of ESG factors in investment analysis and investment decisions. ESG integration can be considered to be the analysis of all material factors in investment analysis and decision making.

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Environmental

Takes into consideration the impact companies are having upon the planet today and in the future.

  • Pollution, waste and emissions

  • Raw material sourcing

  • Native bio-systems and species

  • Renewable energy and efficiency

  • Recycling

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Social

Takes into consideration the social impact companies are having upon people in the world.

  • Human rights

  • Workers conditions and rights

  • Corporate citizenship

  • Wider community

  • Consumer protection

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Governance

Takes into consideration the interests of all stakeholders affected by the company's activities.

  • Business ethics

  • Equality and diversity

  • Fair treatment of labour

  • Health and safety

  • Shareholder rights

An investment approach that includes investments on the basis of specific themes. Examples of themes include investing for clean energy, energy efficiency solutions, healthcare solutions and financial inclusion.

WHAT IS BEST-IN-CLASS?

An investment approach that focuses on capturing sector-leading companies when measuring certain sustainability criteria. This approach seeks to identify the best company within a sector rather than excluding the sector as a whole. An example would include investing in the most energy efficient or lowest carbon energy provider.

WHAT IS STEWARDSHIP OR ACTIVE OWNERSHIP?

Stewardship is defined in general terms as the responsible management of something entrusted to one’s care. In

terms of investing, stewardship typically aims to promote the long-term success of companies through monitoring

and engaging with their strategy, performance, risk, structure, and corporate governance, including culture

and remuneration as well as social and environmental issues. The goal is to enhance shareholder value and help

companies to achieve their potential, as well as leading to long-term benefits for society and the economy. It will likely involve a significant dialogue between investor and company and actively voting at shareholder meetings.

WHAT IS ENGAGEMENT?

Purposeful dialogue between investors and companies on ESG and other matters in order to promote responsible

business practice. Engagement can help drive positive change as well as enhance an investors’ research, providing

insight into company strategy, competitive positioning and efforts to manage risks and opportunities.

WHAT IS THEMATIC INVESTING?

Engagement can be a powerful tool for bringing about positive change

As an investor in a company, you can engage with a company’s management by exercising your voting rights at shareholder

meetings. These events can bring a material change to an organisation, by voting on resolutions that impact the way in

which the company is operated, such as the appointment and remuneration of board members or financial considerations such as dividend approval or rights issues.

Where an investor excludes investment in activities which are not compatible with their values, this approach may reduce the

number of possible investment opportunities available to the investor. Limiting the number of opportunities by excluding certain sectors or stocks according to any factor can incur an ‘opportunity cost’, in terms of the potential performance foregone.

 

Yet there is evidence that some responsible investing approaches can lead to higher shareholder returns. Businesses that address short term risks whilst adapting to longer term structural trends should have more chance of success than businesses that don’t. Poor environmental, social and governance practices, may ultimately be harmful to a business. Socially responsible investing means favouring companies that value long term business sustainability, not just short term profitability, and in the long run that could lead to better long-term returns for shareholders.

This is why we believe investors should be conscious of ESG factors when assessing investments. After all, to ignore them could mean not fully assessing the risks to which an investment is exposed. Companies are also aware there is increasing emphasis on transparency and high standards that go far beyond the traditional financial metrics on which investors have historically focused. Ultimately, this affects the extent to which they can attract capital and the rates at which they can borrow, so they have a vested interest in improving their business practices. The more people invest responsibly, the greater the pace of corporate change.

 

By taking ESG factors into account, investors are likely to deliver better results – both in terms of long-term shareholder returns and environmental, social and governance impacts – which is why this form of investing is becoming more prominent. Indeed, we believe it will soon become standard practice for ESG characteristics to be considered prominently

alongside traditional financial metrics.

DOES SOCIALLY RESPONSIBLE INVESTING MEAN GIVING UP RETURNS?