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www.incisiveworks.com
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INVESTMENT RISKS
Cycles and
sustainability
Ashley Hamilton Claxton on the realities of engaging with companies
Cycles and
sustainability
The key components of responsible investment at RLAM
Our sustainable approach
Our sustainable
approach
Q&A with Mike Fox
RLAM’s Mike Fox and Ashley Hamilton Claxton on where values-based investing is heading
Q&A with Mike Fox
ustainable investing is suffering from growing pains,
as regulators and journalists question the authenticity and transparency of the increasing number of funds
and fund launches. Nearly everyone agrees that investors need to be able to better differentiate between the goals of each fund, and to be able to relate these goals to each fund’s investment process and the assets that it holds.
S
In this Spotlight, Mike Fox, Royal London Asset Management’s Head of Sustainable Investments, points up the implications of this tightening of attitudes. He relates this to RLAM’s own sustainable investment process, setting out how his team conducts each sustainability analysis and reaches a judgment on whether a security is investable. Along the way, Fox touches on key flashpoints in today’s industry debate, including whether it is possible to quantify and score sustainability, and how we can make rounded assessments of sustainability across disparate dimensions whilst retaining an element of rigour.
“Some saw creating a sustainable fund as a relatively cheap and easy option – but it's an expensive, complicated option because of the degree of investment process change that you need”
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Sustainable Investing
For Professional Clients only, not for Retail Clients
Past performance is not a guide to future performance.
The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.
Mike Fox on building a three-dimensional view of sustainability
IMPORTANT INFORMATION
For more information on the sustainable funds range or the risks of investing, please refer to the relevant Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk.
Issued in November 2021 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
For professional clients only, not suitable for retail clients. This is a financial promotion and is not investment advice.
The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and are not investment advice.
For more information visit: www.incisiveworks.com
This digital experience is an Incisive Works product
© 2021 Incisive Business Media (IP) Limited
INVESTMENT RISKS
IMPORTANT INFORMATION
Past performance is not a guide to future performance.
The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.
For professional clients only, not suitable for retail clients. This is a financial promotion and is not investment advice.
The views expressed are those of the contributors at the date of publication unless otherwise indicated, which are subject to change, and are not investment advice.
Issued in July 2021 by Royal London Asset Management Limited, 55 Gracechurch Street,
London, EC3V 0RL. Authorised and regulated
by the Financial Conduct Authority, firm reference number 141665. A subsidiary of
The Royal London Mutual Insurance Society Limited.
In this Spotlight, Mike Fox, Royal London Asset Management’s Head of Sustainable Investments, points up the implications of this tightening of attitudes. He relates this to RLAM’s own sustainable investment process, setting out how his team conducts each sustainability analysis and reaches a judgment on whether a security is investable. Along the way, Fox touches on key flashpoints in today’s industry debate, including whether it is possible to quantify and score sustainability, and how we can make rounded assessments of sustainability across disparate dimensions whilst retaining an element of rigour.
“Some saw creating a sustainable fund as a relatively cheap and easy option – but it's an expensive, complicated option because of the degree of investment process change that
you need”
he growth of responsible and sustainable investing is changing the shape of the investment industry and could prove critical in
supporting the transition to a lower carbon and more socially just world.
S
Sustainable Investing
For Professional Clients only
IN PARTNERSHIP WITH
Mike Fox on building a three-dimensional view of sustainability
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We asked one of the UK’s most experienced sustainable investors, Mike Fox, Head of Sustainable Investments at RLAM, about the market implications – and to explain how RLAM’s sustainable investment process attempts to capture a more three-dimensional view of corporate sustainability.
make their goals and underlying processes transparent to investors.
ore and more sustainable funds are being launched to meet growing investor appetite, but regulators and industry commentators are increasingly questioning whether all these funds are authentic and run in ways that
M
“The volume of sustainability information that corporates are now publishing is night and day versus even a couple of years ago”
Can we build a more transparent, three-dimensional view of sustainability?
RLAM’s Mike Fox on how regulatory and industry trends are reshaping sustainable investing
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This letter to the industry was a triggered by the FCA’s concern about “the number of poor-quality fund applications we have seen and the impact this may have on consumers.” The letter aimed to improve both the quality and clarity of Environmental, Social and Governance (ESG) and sustainable funds by setting out some guiding principles, notably calling on those launching sustainable funds to be clearer in how they describe and distinguish their chosen strategy; to improve disclosure; and to make sure resources have been put in place to achieve the stated objectives.
The FCA ‘Dear chair’ letter – July 2021(1)
(1) FCA: Authorised ESG & Sustainable Investment Funds: Improving Quality and Clarity, July 2021: https://bit.ly/3pf2LAD
“For our sustainable process, we believe a company should be scored according to where it is now. We don't want to risk baking in optimism. There is an argument that ESG scoring should have a ‘brown to green’ element, i.e., should try to score the future rather than the present. But we would rather score as things stand today, identify issues that the company needs to improve, and then when we see them improve, increase our score. If a company commits to specific changes – for example, disposing of coal power generation – we could increase our scoring at that point.”
Is Directional Scoring the right way to go?
Social spirit
Research framework
We may be entering into a shake-out period. The large number of funds launched in the last one or two years have come to the market with different definitions, interpretations and views of what sustainability should be. Going forward, we’ll see more ‘law and order’ and more consistency about what sustainability means.
What do you think the tightening of regulatory attitudes means in terms of broad industry direction?
It's a reasonable assumption to say you might need twice as much resource to run a sustainable process as a traditional one. The reason for that is if you're purely financially focused, you're looking at P&L, balance sheets, cash flows; whereas if you're sustainability focused, you additionally need to examine all the ESG factors. And we think you can do a similar amount of analysis on ESG as on the financials.
Can you put any sort of magnitude on that extra resourcing?
Before recent interventions – for example, the EU’s Sustainable Finance Disclosure Regulation (SFDR) and especially this July’s FCA ‘Dear chair’ letter – some saw creating a sustainable fund, either in isolation or through the evolution of an existing fund, as a relatively cheap and easy option. But it's actually a very expensive and complicated option because of the degree of investment process change that you need if you are going to build a rounded picture of a company’s sustainability.
Only in part. There's much more subjectivity in sustainability than in financial analysis and clients can have strong views - for example, are the US tech giants sustainable? A non-consensus view may be regarded as profoundly wrong by your client.
Is the resourcing just a case of employing more people, e.g., ESG analysts?
So, we think that sustainable approaches need due process, including a degree of oversight from people who are independent from the performance of the fund so the fund manager can say, “It's not just me deciding what's right and wrong in the world: we enact a process which gives us information and supports our conclusion.”
The volume of information that corporates are now publishing on E and S particularly –
G has been there for a while – is night and day versus even a couple of years ago. Quantitative metrics now need to be sought out to evidence the points that corporates might have made to us on a purely qualitative basis in the past. That is creating, along with a re-emphasis on negative screening – see box out – much bigger and broader sustainability research notes than even two years ago.
Does the growth in quantitative data about corporate sustainability reduce, or compound, these issues?
It comes first. If we can't prove to ourselves that it's a sustainable business, then we won't even bother doing the financial work. Our approach to the sustainability analysis itself is probably best explained through a practical example (see box out below).
Where does the sustainability analysis sit within your wider investment process?
Fox says that negative screening has gone through a huge life cycle. Early ethical/sustainable investment was built around negative screens; then around 10 years ago these became less talked about because they were perceived to be detrimental to investment performance.
Negative screening – back in fashion?
But partly because of new European regulation, and its emphasis on ‘do no significant harm’, Fox says there's now again a much heavier focus on negative screening – across the industry and in RLAM’s work.
I started my career in the late 1990s when financial information was harder to come by and there weren't big data sets. Then financial data exploded. But arguably more fund managers underperform the market now than then – an explosion of data can be a hindrance if it leads you down false alleys. Indeed, in sustainable investing, the qualitative ‘skilled artisan’ element of the decision-making process may represent the true competitive advantage for some funds, precisely because it's much harder for computers and quants to access.
For us, conducting a thorough sustainability test is philosophical: we only invest in companies that we regard as sustainable companies. But we’d argue it is also practical, because if the company is not doing well in terms of sustainability, ultimately we think it is less likely to do well financially.
I think the biggest challenge is information and, particularly, relating it to investment decisions. Historically there has been too little data, and now there's almost a number for everything, but does that number mean anything?
What is the key challenge to building a three-dimensional view of a company’s sustainability?
It can be difficult explaining to clients that not everything can be quantified. Carbon footprints and environmental impact are relatively susceptible to quantification, while social aspects are often much trickier: is social media a good or a bad thing?
In addition, once you've found the most relevant quantitative information, and conducted the qualitative analysis of the ESG pillars, there's still a lot of subjectivity in bringing those elements together to give you a rounded, three-dimensional picture of a company. You have to take that final piece of work, the sustainability report, and conclude what you want to do with it in terms of making an investment decision.
“If we can't prove to ourselves that it's a sustainable business, then we won't even bother doing the financial work”
To set the scene, I should explain that at RLAM we need the ability to approve things internally within short time frames. This really came from inter-global credit where you often have a very short timeframe in which to respond.
Can you tell us about your structure and process for doing that?
The analyst scores a company first as they write the detailed stocksheet, and it is the content of this note, including the scores, which is debated and then agreed on. We have an internal group of people, broadly the people who work on the funds across the business, to whom we circulate our sustainability research. Their vote effectively ratifies the note and its scores or, through discussion and debate, changes them.
Basically, if even one of those people says that the sustainability profile is not right for us, then we send the issue to our independent external advisory committee. That allows us to filter out the more ambiguous decisions or those where one individual has a contrary view, while dealing with the easy decisions quickly. I should explain that the ‘easy’ decisions also go to the advisory committee as well, at their next meeting, to make sure they can comment.
“Take the example of a company in the automotive industry that provides products that help with building electric and autonomous vehicles. First, we’d ask ourselves whether that company actually has a net benefit to society. Automotive products are one of the world’s biggest polluters and, through road accidents, a major source of accidental deaths. So, if our chosen company offers products and services that mitigate either or both of those two issues, then intuition suggests we might be looking in the right direction.
Once we make that initial intuitive judgement, we have to analyse the company. We always start with a very thorough corporate governance assessment of the business, asking a number of questions around not just remuneration and board structure but also how they've treated stakeholders – not just shareholders – in the past.
If we can get past the corporate governance test, we start on the environmental and social factors. For every company, we conduct an environmental assessment using, for example, much better carbon data than we used to be able to obtain.
Then we explore the wider E&S issues. For example, in the case of an automotive component supplier, they have big manufacturing footprints and large, often relatively lowly paid workforces – and many have outsourced manufacturing to lower-cost economies. So, there are many potential labour issues.
The final test for us might be to look at the products and services in more depth – documenting whether these will indeed reduce road deaths and decrease emissions. Can we evidence that? That in totality gives us a view as to whether the business is a sustainable business as we would define it.
Only after that do we start the financial analysis, which is fairly traditional in terms of how we think about investing except that we also take the output from our sustainability analysis and use that to stretch our thinking. For example, the sustainability analysis may suggest a financial risk or, more positively, that there's going to be greater demand over a longer timeframe for certain products than the wider market realises.”
MIKE FOX
Head of Sustainable Investments
“You have to remain honest about the limitations of scoring – its key value is in helping us rank our investment ideas relative to
each other”
That’s a fascinating, controversial topic. Not all the members of our advisory committee are comfortable about the scoring element. For example, can you really put a number against a company’s culture? On the other hand, the client view tends to be that scoring is useful at least at an indicative level, and they also like it because it's intuitive. So those are the two bookends we work with!
Given your caveats about the quantitative evidence, how do you approach putting numbers into the balanced scorecard that sits behind your decisions?
We try not to aim for false precision. If you push us on the difference between a score of 11 or 12 on corporate governance, it isn't easy to articulate. But between a score of 10 and 18; absolutely we can back that up.
Turning disparate, qualitative evidence into numbers is predominantly a relative judgement. It takes experience: once you've executed hundreds of these decisions as a team, you build skills in calibration and understanding where the decision sits in the spectrum of opportunities. That makes sense because when it comes to constructing the portfolio, we are, ultimately, making judgements on the most attractive relative to the pool of opportunities.
You have to remain honest about the limitations of scoring – its key value is in helping us rank our investment ideas relative to each other.
More the former than the latter. For example, feeding into our score for the sustainability of a company’s operations is a separate, underlying piece of corporate governance analysis. We make our relative scoring judgement on that topic and for other underlying issues such as climate. Then the individual issues are aggregated up.
Is the final score produced by aggregating the individual scorecard elements, or do you look at the evidence in its totality to generate a score?
Working on the issues individually and aggregating them makes the process more honest, because you're not tempted to ignore something because you're particularly impressed by some other factor. However, we always inject a bit of common sense in terms of whether that aggregated view makes sense in totality.
Yes, because both are important. However, products and services are inherently easier to get your head round – and that explains a lot about many sustainable funds launched recently.
You assess both the ESG profile of the company’s operations and the impact of its products and services on the wider world?
For example, a manager can easily come up with a list of 50 stocks that look great from a products and services perspective, whether the focus is offshore wind or healthcare. By contrast, understanding in depth whether a company is doing well in terms of its behaviours and ESG practices takes a lot more work. Investors don’t always recognise this when they try to distinguish between various funds and their processes.
My point is not that focusing on products and services is ineffective – it is that you may not really need a proper, differentiated sustainable investment process to do it.
A particular advantage of in-depth ESG analysis is that you may be able to find companies that are leaders in terms of their ESG profiles but that don’t fit into a basic thematic construct – maybe an international cosmetics group or a high street food retailer who are making a real difference in terms of how they behave. We think it makes sense to apply a more three-dimensional approach to help us seek out market inefficiencies in how sustainability is assessed and identify less-obvious investments.
Mike Fox explains how his team assesses an individual company
We asked Mike Fox whether a company’s sustainability should be assessed in terms of the company’s current behaviour or its likely trajectory
For illustrative purposes only. This does not constitute an investment recommendation.
* Sustainability Accounting Standards Board
Find out more about our range of sustainable funds at rlam.co.uk/sustainable
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03 / 04
02 / 04
Assessing sustainability – an automotive example
01 / 04
04 / 04
The views expressed are the contributor’s own at the date of publication unless otherwise indicated, which are subject to change and are not investment advice.
For Professional Clients only, not suitable for Retail Clients
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Assessing sustainability – an automotive example
“Take the example of a company in the automotive industry that provides products that help with building electric and autonomous vehicles. First, we’d ask ourselves whether that company actually has a net benefit to society. Automotive products are one of the world’s biggest polluters and, through road accidents, a major source of accidental deaths. So, if our chosen company offers products and services that mitigate either or both of those two issues, then intuition suggests we might be looking in the right direction.
Mike Fox explains how his team assesses an individual company
01 / 04
My starting point is that not everything that matters can be measured
“The move to quantify everything could really be dangerous if it ends up removing that human layer of judgment”
“Be honest and truthful, forget the glossy brochures, get your purpose right, get your North Star correct, and then get your business aligned with how you want to behave, and all of the data and information should flow from that. Tacking an ESG report onto the side of your business won’t work: we'll see right through it.”
Can companies with poor ESG records turn over a new leaf?
Royal London Asset Management is one of the longest-established responsible investors in the industry. So, what does its experienced team think are the most fruitful paths and potential dead-ends in the latest market developments?
who has lived with a teenager knows that fast
maturation comes with challenges and a few wrong turns.
he world needs responsible and sustainable investing to mature and grow so that it can drive beneficial
change more quickly. But anyone
T
For Professional Clients only, not suitable for Retail Clients
The views expressed are the contributor’s own at the date of publication unless otherwise indicated, which are subject to change and are not investment advice.
Can we build a more transparent, three-dimensional view of sustainability?
RLAM’s Mike Fox on how regulatory and industry trends are reshaping sustainable investing
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We chose six engagement themes back in 2019 with the intention of keeping them for at least two years and then reviewing. They are climate change, which everyone across the industry is doing; social and financial inclusion, which is important for us as a mutual and also through some of our exposures to financial services in the bond space; the circular economy, which is new to us as a theme and which will also help us tackle things like biodiversity; corporate governance; diversity; and innovation and technology in society.
Can you tell us about your key engagement themes and how you approach them?
A good example is social and financial inclusion and how it links to climate risk. We've been championing a ‘just transition’, or the idea that we have to make sure that as we transition to a low-carbon economy, we understand and address the social and economic impact. I grew up in Alberta where my dad worked in the oil sands for over 40 years, so I’m conscious that we may not be able to shift the dial on climate risk fast enough if people are afraid of losing their jobs.
(1) FCA: Authorised ESG & Sustainable Investment Funds: Improving Quality and Clarity, July 2021: https://bit.ly/3pf2LAD
We may be entering into a shake-out period. The large number of funds launched in the last one or two years have come to the market with different definitions, interpretations and views of what sustainability should be. Going forward, we’ll see more ‘law and order’ and more consistency about what sustainability means.
What do you think the tightening of regulatory attitudes means in terms of broad industry direction?
It's a reasonable assumption to say you might need twice as much resource to run a sustainable process as a traditional one. The reason for that is if you're purely financially focused, you're looking at P&L, balance sheets, cash flows; whereas if you're sustainability focused, you additionally need to examine all the ESG factors. And we think you can do a similar amount of analysis on ESG as on the financials.
Can you put any sort of magnitude on that extra resourcing?
Only in part. There's much more subjectivity in sustainability than in financial analysis and clients can have strong views - for example, are the US tech giants sustainable? A non-consensus view may be regarded as profoundly wrong by your client.
Only in part. There's much more subjectivity in sustainability than in financial analysis and clients can have strong views - for example, are the US tech giants sustainable? A non-consensus view may be regarded as profoundly wrong by your client.
Is the resourcing just a case of employing more people, e.g., ESG analysts?
The volume of information that corporates are now publishing on E and S particularly –
G has been there for a while – is night and day versus even a couple of years ago. Quantitative metrics now need to be sought out to evidence the points that corporates might have made to us on a purely qualitative basis in the past. That is creating, along with a re-emphasis on negative screening – see box out – much bigger and broader sustainability research notes than even two years ago.
Does the growth in quantitative data about corporate sustainability reduce, or compound, these issues?
It comes first. If we can't prove to ourselves that it's a sustainable business, then we won't even bother doing the financial work. Our approach to the sustainability analysis itself is probably best explained through a practical example (see box out below).
This letter to the industry was a triggered by the FCA’s concern about “the number of poor-quality fund applications we have seen and the impact this may have on consumers.” The letter aimed to improve both the quality and clarity of Environmental, Social and Governance (ESG) and sustainable funds by setting out some guiding principles, notably calling on those launching sustainable funds to be clearer in how they describe and distinguish their chosen strategy; to improve disclosure; and to make sure resources have been put in place to achieve the stated objectives.
The FCA ‘Dear chair’ letter – July 2021(1)
Fox says that negative screening has gone through a huge life cycle. Early ethical/sustainable investment was built around negative screens; then around 10 years ago these became less talked about because they were perceived to be detrimental to investment performance.
It comes first. If we can't prove to ourselves that it's a sustainable business, then we won't even bother doing the financial work. Our approach to the sustainability analysis itself is probably best explained through a practical example (see box out below).
Where does the sustainability analysis sit within your wider investment process?
I think the biggest challenge is information and, particularly, relating it to investment decisions. Historically there has been too little data, and now there's almost a number for everything, but does that number mean anything?
I started my career in the late 1990s when financial information was harder to come by and there weren't big data sets. Then financial data exploded. But arguably more fund managers underperform the market now than then – an explosion of data can be a hindrance if it leads you down false alleys. Indeed, in sustainable investing, the qualitative ‘skilled artisan’ element of the decision-making process may represent the true competitive advantage for some funds, precisely because it's much harder for computers and quants to access.
It can be difficult explaining to clients that not everything can be quantified. Carbon footprints and environmental impact are relatively susceptible to quantification, while social aspects are often much trickier: is social media a good or a bad thing?
I think the biggest challenge is information and, particularly, relating it to investment decisions. Historically there has been too little data, and now there's almost a number for everything, but does that number mean anything?
What is the key challenge to building a three-dimensional view of a company’s sustainability?
To set the scene, I should explain that at RLAM we need the ability to approve things internally within short time frames. This really came from inter-global credit where you often have a very short timeframe in which to respond.
To set the scene, I should explain that at RLAM we need the ability to approve things internally within short time frames. This really came from inter-global credit where you often have a very short timeframe in which to respond.
The analyst scores a company first as they write the detailed stocksheet, and it is the content of this note, including the scores, which is debated and then agreed on. We have an internal group of people, broadly the people who work on the funds across the business, to whom we circulate our sustainability research. Their vote effectively ratifies the note and its scores or, through discussion and debate, changes them.
04 / 04
Only after that do we start the financial analysis, which is fairly traditional in terms of how we think about investing except that we also take the output from our sustainability analysis and use that to stretch our thinking. For example, the sustainability analysis may suggest a financial risk or, more positively, that there's going to be greater demand over a longer timeframe for certain products than the wider market realises.”
Then we explore the wider E&S issues. For example, in the case of an automotive component supplier, they have big manufacturing footprints and large, often relatively lowly paid workforces – and many have outsourced manufacturing to lower-cost economies. So, there are many potential labour issues.
The final test for us might be to look at the products and services in more depth – documenting whether these will indeed reduce road deaths and decrease emissions. Can we evidence that? That in totality gives us a view as to whether the business is a sustainable business as we would define it.
03 / 04
Once we make that initial intuitive judgement, we have to analyse the company. We always start with a very thorough corporate governance assessment of the business, asking a number of questions around not just remuneration and board structure but also how they've treated stakeholders – not just shareholders – in the past.
If we can get past the corporate governance test, we start on the environmental and social factors. For every company, we conduct an environmental assessment using, for example, much better carbon data than we used to be able to obtain.
02 / 04
“Take the example of a company in the automotive industry that provides products that help with building electric and autonomous vehicles. First, we’d ask ourselves whether that company actually has a net benefit to society. Automotive products are one of the world’s biggest polluters and, through road accidents, a major source of accidental deaths. So, if our chosen company offers products and services that mitigate either or both of those two issues, then intuition suggests we might be looking in the right direction.
Mike Fox explains how his team assesses an individual company
01 / 04
PREV
NEXT
Assessing sustainability – an automotive example
The analyst scores a company first as they write the detailed stocksheet, and it is the content of this note, including the scores, which is debated and then agreed on. We have an internal group of people, broadly the people who work on the funds across the business, to whom we circulate our sustainability research. Their vote effectively ratifies the note and its scores or, through discussion and debate, changes them.
“If we can't prove to ourselves that it's a sustainable business, then we won't even bother doing the financial work”
That’s a fascinating, controversial topic. Not all the members of our advisory committee are comfortable about the scoring element. For example, can you really put a number against a company’s culture? On the other hand, the client view tends to be that scoring is useful at least at an indicative level, and they also like it because it's intuitive. So those are the two bookends we work with!
That’s a fascinating, controversial topic. Not all the members of our advisory committee are comfortable about the scoring element. For example, can you really put a number against a company’s culture? On the other hand, the client view tends to be that scoring is useful at least at an indicative level, and they also like it because it's intuitive. So those are the two bookends we work with!
That’s a fascinating, controversial topic. Not all the members of our advisory committee are comfortable about the scoring element. For example, can you really put a number against a company’s culture? On the other hand, the client view tends to be that scoring is useful at least at an indicative level, and they also like it because it's intuitive. So those are the two bookends we work with!
Research framework
That’s a fascinating, controversial topic. Not all the members of our advisory committee are comfortable about the scoring element. For example, can you really put a number against a company’s culture? On the other hand, the client view tends to be that scoring is useful at least at an indicative level, and they also like it because it's intuitive. So those are the two bookends we work with!
Given your caveats about the quantitative evidence, how do you approach putting numbers into the balanced scorecard that sits behind your decisions?
More the former than the latter. For example, feeding into our score for the sustainability of a company’s operations is a separate, underlying piece of corporate governance analysis. We make our relative scoring judgement on that topic and for other underlying issues such as climate. Then the individual issues are aggregated up.
More the former than the latter. For example, feeding into our score for the sustainability of a company’s operations is a separate, underlying piece of corporate governance analysis. We make our relative scoring judgement on that topic and for other underlying issues such as climate. Then the individual issues are aggregated up.
Working on the issues individually and aggregating them makes the process more honest, because you're not tempted to ignore something because you're particularly impressed by some other factor. However, we always inject a bit of common sense in terms of whether that aggregated view makes sense in totality.
Is the final score produced by aggregating the individual scorecard elements, or do you look at the evidence in its totality to generate a score?
For example, a manager can easily come up with a list of 50 stocks that look great from a products and services perspective, whether the focus is offshore wind or healthcare. By contrast, understanding in depth whether a company is doing well in terms of its behaviours and ESG practices takes a lot more work. Investors don’t always recognise this when they try to distinguish between various funds and their processes.
My point is not that focusing on products and services is ineffective – it is that you may not really need a proper, differentiated sustainable investment process to do it.
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computing, artificial intelligence and urban regeneration. Companies that are leading the transition to a low-carbon economy, or driving social and economic development in emerging markets also form part of our holdings. We are constantly on the search for the leaders in their fields, with excellent management teams and strong franchises. At the same time, we won't invest in companies involved with activities such as tobacco, nuclear power generation, animal fur and arms.
e look for companies that are innovative and responsible, that have a strong, long-term potential for growth, and aim to positively benefit society. This means companies involved in fields such as healthcare, cloud
W
Our sustainable approach
Our sustainable range
Our team is an experienced one with a long-term track record. We’ve been managing the sustainable funds since 2003, through varied market, economic and social cycles. The team is supported by RLAM’s Equity and Fixed Income teams, and works closely with our Responsible Investment team.
Our key strengths
Experienced and diverse team
WITH long track record
(1) RLAM as at 31 August 2021
Source.
Differentiated process
flexible
Past performance is not a guide to future performance.
• Managing Sustainable funds since 2003
• Detailed due diligence
• Equity, debt, UK and Global
• Pooled and bespoke solutions
• Independent analysis
• Consistent scorecard approach
• Experienced over market, economic and
social cycles
Equity
Multi Asset
World
IA Mixed Investment 40%-85%
Shares Sector
Multi Asset
Diversified
IA Mixed Investment 20%-60%
Shares Sector
Multi Asset
Managed Growth
IA Mixed Investment
0%-35%
Shares Sector
Fixed
Income
Managed Income
IA Sterling
Corporate Bond
Sector
IA Global Bond
Leaders
IA UK
All Companies
Sector
Global Equity
IA Global Sector
Our core principles
sustainable
financial (equity)
financial (fixed income)
Products and Services
Cleaner, healthier, safer, more inclusive society
ESG Leadership
Encouraging good corporate behaviour
Value creation
Returns ahead of cost of capital
Valuation
Paying a fair price
Bondholder protection
Focus portfolios on security, covenants
and structure
Reduce stock specific risk
Diversification
Our sustainable themes for equity and fixed income
ESG leadership
Energy
transition
Circular
economy
Electric / autonomous vehicles
AI & cloud
computing
Industry 4.0
Next generation
medicine
Agriculture &
naturalness
Infrastructure
Financial
resilience
Community
funding
Social housing
For illustrative purposes – reflects approximate percentage asset allocation, weightings may vary.
Global Credit
(1)
Sustainable themes are diversified across sectors and asset classes
Sustainable range AUM £12.3b (as at 31 August 2021)
2020 engagement activity – a snapshot
responsible investment and good governance across all asset classes. Alongside this, we also believe that considering environmental, social and governance (ESG) issues in the investment process can help us deliver better returns for our customers and clients.
LAM is committed to being a responsible investor. This means being a good steward of our clients’ assets and promoting
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Engagement & advocacy – a key pillar of this approach
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potential for growth, and aim to positively benefit society. This means companies involved in fields such as healthcare, cloud computing, artificial intelligence and urban regeneration. Companies that are leading the transition to a low-carbon economy, or driving social and economic development in emerging markets also form part of our holdings. We are constantly on the search for the leaders in their fields, with excellent management teams and strong franchises. At the same time, we won't invest in companies involved with activities such as tobacco, nuclear power generation, animal fur and arms.
Our key strengths
financial (equity)
Value creation
Returns ahead of cost of capital
Valuation
Paying a fair price
sustainable
Products and Services
Cleaner, healthier, safer, more inclusive society
ESG Leadership
Encouraging good corporate behaviour
financial (fixed income)
Bondholder protection
Focus portfolios on security, covenants
and structure
Reduce stock specific risk
Diversification
Our core principles
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Sustainable range AUM £12.3b (as at 31 August 2021)
Source: RLAM. For illustrative purposes – reflects approximate percentage asset allocation, weightings may vary.
For illustrative purposes – reflects approximate percentage asset allocation, weightings may vary.
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Cycles and sustainability
RLAM’s Head of Sustainable Investments, Mike Fox offers his outlook on where we might be in the economic cycle and what impact – if any – that has on his sustainable investing
“ ‘Innovators versus disrupted’ is now a much better construct than ‘value versus growth’ ”
The views expressed are the contributor’s own at the date of publication unless otherwise indicated, which are subject to change and are not investment advice.
For Professional Clients only, not suitable for Retail Clients
for 10, 15 years and then often go sideways for a similar amount of time. So, you can look at 1982 to 1999 as one bull market, then 1999 to 2009 was a decade of not going anywhere fast, and then in 2009, following the global financial crisis, the early stages of the present bull market seem to have kicked in.”
ur view is that we're in the latter stages of a bull market which began in 2009,” says Mike Fox, a veteran, multi-cycle sustainable investor. “If you look at the history of stock markets over 50, 70 years, bull markets tend to go on
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But he’s not saying the end of the bull market is imminent. “There's lots of liquidity around, and we are not where we were in 2007-2009, when the world was falling apart. There's enough caution out there, from enough people, that I don't think we're at the market top – though predictions can be dangerous.”
“The latter stages of bull markets are often the most profitable but they're the most difficult as well in terms of timing,” he says. “What typically happens in the last year or two is that you get a capitulation of the more downbeat views about how the world is evolving – that moment when the last bear becomes a bull.”
“If in 12 months’ time, inflation – or stagflation – has not proven to be a problem, the market narrative may be that we can conquer anything: ‘If we can get through Covid, while saving the economy, what can possibly hurt us?’ That might be the moment to really start worrying.”
While government support has been vital to many industries, he thinks more fundamental economic forces are playing out. “If you think about what's happened with cloud computing, there is no business that we know of that has truly adopted technology to its optimum level – not one. Inertia is the biggest competitor to change and to deal with that you need dislocating events – and that’s really that's what the pandemic was.”
Fundamental forces
Chief technology officers who were thinking before the pandemic that ‘maybe I should adopt the cloud’, he says, have now realised that migration is critical in terms of risk managing future disruptions, cutting costs, and facilitating the likely long-term swing towards more flexible working. Technology adoption could fuel productivity gains in a wider set of industries, he feels, aside from the benefit to tech firms.
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Asset prices are arguably already high, however, so how does that affect his investment decisions? “As assets get more expensive, you have to have much more conviction they can grow for longer,” he says. “It's fortunate that versus even 18 months ago, pre-pandemic, we do actually think that certain assets are much more likely to grow for much longer, following the pandemic’s acceleration of various secular trends that we can see around us such as digitalisation. The increase in valuations is, we think, in some areas being offset by a genuine increase in prospects.”
That belief relates to what Fox says was the pandemic’s biggest surprise for investors. “I think the most valuable piece of information we could have all had in March 2020 was that in aggregate corporate profitability will be higher because of the pandemic. Which is a bit like a double take – when you write it down you've got to make sure you've not made a typo. Of course, the effect has been very mixed – technology and healthcare are much bigger and more profitable than airlines and restaurants – but it’s a critical point and offers reassurance that some of the market movement may have been justified.”
Expensive assets
There are many shorter-term tail risks, including the advent of new Covid-19 variants, inflation, geopolitical risks and developments within China. “But taking a 10-20 year view, a whole bunch of industries are going to look very, very different. Society is likely to become much less carbon intensive, more healthcare oriented, and more digitised. In that timeline, market and economic cycles will turn but, in the end, we largely choose not to invest around those. We prefer to invest in what we think are these longer term environmental and social changes with a view that this will serve us better than trying to time things.”
What does his stance mean for investors choosing whether to back ‘value’ or ‘growth’ styles of investing during an uncertain recovery? “We think the value/growth construct is simply the wrong way of looking at markets today,” he says. “It made more sense 15 or 20 years ago when ‘reversion to the mean’ investing still worked. ‘Innovators versus disrupted’ is now a much better construct than ‘value versus growth’.”
Longer horizons
How does that belief in secular trends and innovation square with Fox’s emphasis on company-by-company analysis and operational performance? “Themes can be useful because they often provide a tail wind to industries and businesses. However, as the theme plays out, there will always be massive winners and losers within it – think of Apple versus Nokia in the early smart phone market,” he says.
“So the real challenge is not so much to recognise the theme, but to find the long-term sustainable winners within that theme. That’s where the right kind of bottom-up analytical process, both financial and sustainable, has got to kick in and earn its keep.”
“Taking a 10-20 year view, a whole bunch of industries are going to look very, very different. Society is likely to become much less carbon intensive, more healthcare oriented, and more digitised”
Decarbonising construction and buildings is as important in many respects as decarbonising energy, because of the embedded carbon in buildings and how they're operated. We are
Construction
We’re interested in financial services partly because it's still societally a very unfair industry. Social, gender and other factors mean people end up with very diverse experiences. We think there are interesting business models out there, not often
Financial services
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Renewables
Mike Fox talks about three sectors where RLAM is developing a differentiated view
Renewables, construction and financial services
We do own big players in renewable energy, but we are more cautious about that sector than some other sustainable investors. Energy transition is absolutely critical to our society but it looks more ambiguous from an investment perspective once you take note of the fundamentally homogenous nature of energy, combined with the wall of capital that's going into energy transition.
That said, I’m not so sure that pure, good quality green assets are massively overpriced. If you look at the trade values of built-out offshore wind in the private market, they are a level above the public market. And the reason is that private owners are often liability-led, pension-led, and are prepared to forward forecast 10, 15 years, whereas listed investors often have a much shorter horizon.
finding ways of gaining access to that by owning construction companies that provide products and services that result in less carbon intensity in the development process.
owned by sustainable funds, that are making credit a lot fairer. That’s in line with our goal of developing investment insights that support our sustainability credentials, while allowing us to move into less crowded spaces.
For professional clients only, not suitable for retail investors.
The views expressed are the contributors’ own and do not constitute investment advice.
We've come up with a climate score which I think is innovative. We've decided to split climate out from environment, for two reasons. First, it recognises that climate affects every company; and second, it recognises that in ESG scores, the climate metrics and variables tend to drown out other important environmental issues like water usage and a company’s impact on biodiversity.
“We've been championing a ‘just transition’ to make sure that as we transition to a low-carbon economy, we address the social and economic impact”
Cycles and sustainability
RLAM’s Head of Sustainable Investments, Mike Fox offers his outlook on where we might be in the economic cycle and what impact – if any – that has on his sustainable investing
scroll
We asked one of the UK’s most experienced sustainable investors, Mike Fox, Head of Sustainable Investments at RLAM, about the market implications – and to explain how RLAM’s sustainable investment process attempts to capture a more three-dimensional view of corporate sustainability.
their goals and underlying processes transparent to investors.
ore and more sustainable funds are being launched to meet growing investor appetite, but regulators and industry make
M
But he’s not saying the end of the bull market is imminent. “There's lots of liquidity around, and we are not where we were in 2007-2009, when the world was falling apart. There's enough caution out there, from enough people, that I don't think we're at the market top – though predictions can be dangerous.”
“The latter stages of bull markets are often the most profitable but they're the most difficult as well in terms of timing,” he says. “What typically happens in the last year or two is that you get a capitulation of the more downbeat views about how the world is evolving – that moment when the last bear becomes a bull.”
Expensive assets
“If in 12 months’ time, inflation – or stagflation – has not proven to be a problem, the market narrative may be that we can conquer anything: ‘If we can get through Covid, while saving the economy, what can possibly hurt us?’ That might be the moment to really start worrying.”
Expensive assets
Asset prices are arguably already high, however, so how does that affect his investment decisions? “As assets get more expensive, you have to have much more conviction they can grow for longer,” he says. “It's fortunate that versus even 18 months ago, pre-pandemic, we do actually think that certain assets are much more likely to grow for much longer, following the pandemic’s acceleration of various secular trends that we can see around us such as digitalisation. The increase in valuations is, we think, in some areas being offset by a genuine increase in prospects.”
While government support has been vital to many industries, he thinks more fundamental economic forces are playing out. “If you think about what's happened with cloud computing, there is no business that we know of that has truly adopted technology to its optimum level – not one. Inertia is the biggest competitor to change and to deal with that you need dislocating events – and that’s really that's what the pandemic was.”
“ ‘Innovators versus disrupted’ is now a much better construct than ‘value versus growth’ ”
Fundamental forces
While government support has been vital to many industries, he thinks more fundamental economic forces are playing out. “If you think about what's happened with cloud computing, there is no business that we know of that has truly adopted technology to its optimum level – not one. Inertia is the biggest competitor to change and to deal with that you need dislocating events – and that’s really that's what the pandemic was.”
There are many shorter-term tail risks, including the advent of new Covid-19 variants, inflation, geopolitical risks and developments within China. “But taking a 10-20 year view, a whole bunch of industries are going to look very, very different. Society is likely to become much less carbon intensive, more healthcare oriented, and more digitised. In that timeline, market and economic cycles will turn but, in the end, we largely choose not to invest around those. We prefer to invest in what we think are these longer term environmental and social changes with a view that this will serve us better than trying to time things.”
What does his stance mean for investors choosing whether to back ‘value’ or ‘growth’ styles of investing during an uncertain recovery? “We think the value/growth construct is simply the wrong way of looking at markets today,” he says. “It made more sense 15 or 20 years ago when ‘reversion to the mean’ investing still worked. ‘Innovators versus disrupted’ is now a much better construct than ‘value versus growth’.”
How does that belief in secular trends and innovation square with Fox’s emphasis on company-by-company analysis and operational performance? “Themes can be useful because they often provide a tail wind to industries and businesses. However, as the theme plays out, there will always be massive winners and losers within it – think of Apple versus Nokia in the early smart phone market,” he says.
We asked Mike Fox whether a company’s sustainability should be assessed in terms of the company’s current behaviour or its likely trajectory
Is Directional Scoring the right way to go?
We’re interested in financial services partly because it's still societally a very unfair industry. Social, gender and other factors mean people end up with very diverse experiences. We think there are interesting business models out there, not often
Financial services
Decarbonising construction and buildings is as important in many respects as decarbonising energy, because of the embedded carbon in buildings and how they're operated. We are
finding ways of gaining access to that by owning construction companies that provide products and services that result in less carbon intensity in the development process.
Construction
We do own big players in renewable energy, but we are more cautious about that sector than some other sustainable investors. Energy transition is absolutely critical to our society but it looks more ambiguous from an investment perspective once you take note of the fundamentally homogenous nature of energy, combined with the wall of capital that's going into energy transition.
Renewables
That said, I’m not so sure that pure, good quality green assets are massively overpriced. If you look at the trade values of built-out offshore wind in the private market, they are a level above the public market. And the reason is that private owners are often liability-led, pension-led, and are prepared to forward forecast 10, 15 years, whereas listed investors often have a much shorter horizon.