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INVESTMENT RISKS
Q&A
Ashley Hamilton Claxton on the realities of engaging with companies
The key components of responsible investment at RLAM
RLAM’S Approach
Paths less trodden
RLAM’s Mike Fox and Ashley Hamilton Claxton on where values-based investing is heading
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meet the teams
To be truly sustainable, funds need an active approach
The active ESG dimension
Responsible recovery?
Changing gear following the pandemic
The ESG Observatory
How TwentyFour’s Observatory took on the ESG data challenge
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Our range of responsible solutions, services and fund
ESG overlays and the danger of stifling performance
The sweet spot
Can we get responsible investing right?
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ESG’s tipping point
Why fixed income can be key to pushing for positive change
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.
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But for advocates of values-based investing like Royal London Asset Management’s Mike Fox, Head of Sustainable Investments, and Ashley Hamilton Claxton, Head of Responsible Investment, the broad acceptance of a message they have been trying to communicate for decades is also a challenge. “We’ve in many ways won the battle,” says Fox, “but now that everybody agrees sustainability matters, what happens next?”
“There are profound social and environmental benefits from sustainable investing, so its integrity must not be diluted and discredited”
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Values-based investing
For Professional Clients only
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.
In this Spotlight, Fox and Hamilton Claxton try to answer that question, and offer their views on the push to closely define and quantify sustainability – while cautioning that at this moment of fast evolution, no-one can truly be certain about what the future holds.
Values-based investing is on the rise
But does it need to watch its step?
IMPORTANT INFORMATION
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.
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 June 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.
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.
SPOTLIGHT
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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?
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 who has lived with a teenager knows that fast maturation comes with challenges
“The move to quantify everything could really be dangerous if it ends up removing that human layer of judgment”
RLAM’s Mike Fox and Ashley Hamilton Claxton on where values-based investing is heading and the strategic implications
“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?
For Mike Fox, Head of Sustainable Investments, the overarching positive change in the last few years is that “responsible and sustainable investing has an influence and cultural acceptance it simply never used to have.”
Accelerating acceptance
According to Fox, who runs RLAM’s sustainable fund range, “the corporate world now understands the potential financial benefits as well as the social benefits of responsible and sustainable investing – a big shift because if a company believes it might get higher valued equity and cheaper debt from improved sustainability practices then its philosophy is going to move pretty rapidly.”
RLAM’s Ashley Hamilton Claxton advises:
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More broadly, the availability of sustainability data is gradually improving and there is increasing pressure from investors and regulators to use that data to back up claims about sustainability.
Data doubts
“Sustainability analysis is on its way to becoming a lot more numeric versus qualitative,” says Fox, “though it’s a change we don’t always agree with philosophically.” Hamilton Claxton explains: “I'm a sociologist by background so my starting point is that not everything that can be measured matters, and not everything that matters can be measured.”
Sources.
(1) United Nations, Report of the World Commission on Environment and Development, Our Common Future, 1987
Ashley Hamilton Claxton, Head of Responsible Investment, has recently been attending broker-arranged conference calls for issuers and says many firms are asking themselves how they can attract the new Environmental, Social and Governance (ESG) oriented investors. “Even the ‘dirty’ companies are realising that this is now affecting capital flows and are reaching out,” she says, though her advice to them is straightforward (see box).
Hamilton Claxton says that a parallel trend is also now clear. “The conversation is moving on from ‘what is the financial ESG risk of my companies or my funds’ to ‘what is their direct impact on sustainability’, in addition to any financial risk implications,” she says. This shift is changing the approach of the Responsible Investment team – who work not just with Fox’s sustainable funds but across RLAM’s investment universe.
“We're thinking more broadly about how we can research, describe and measure the direct impact of large corporations on the world,” she says, “and we’re looking at new information in new ways.”
Researching reality
“In those broker conference calls,” she says, “I told companies that we can now buy algorithms and data sets that are scanning presentations, marketing documents, and news releases relating to your company to tell us what the sentiment is on your company, in real time.”
She welcomes some aspects of the drive to quantify – clients like it and she can use data to try to prove to them that RLAM is doing what it says it is doing. “But it cannot be the end goal because data can be biased, incomplete or simply wrong. The move to quantify everything could really be dangerous if it ends up removing that human layer of judgment,” she says. “And how do you begin measuring a company's lobbying activities, especially if those activities go against what it says in public that it is doing?,” she asks.
The Brundtland Report, sponsored by the United Nations and named after Gro Harlem Brundtland, chair of the World Commission on Environment and Development (WCED), was a milestone in the attempt to build a more sustainable world. The report attempted “to formulate an interdisciplinary, integrated approach to global concerns and our common future,” particularly with respect to sustainable development.
The Brundtland Report – March 1987
In the foreword to the report, Brundtland notes that when its terms of reference were first discussed, some wanted its considerations to be limited to environmental issues only, which she thought would have been ‘a grave mistake’. In the words of the report: “The ‘environment’ is where we all live; and ‘development’ is what we all do in attempting to improve our lot within that abode. The two are inseparable.”¹
Fox thinks there is a danger that numbers will take priority over more subtle word-based judgements. “Words are inconvenient because they're unstructured – you can't spreadsheet them and they can mean different things,” he says. “If you're trying to come up with a low-cost, scalable solution, words are a nightmare – you just want a set of data to crunch and create a sustainable portfolio around.”
“But we're buying companies that exist in the real world,” he says, “and to think that you can entirely numericise those companies during the sustainability analysis and attribute no value to the words that provide context to the sustainability numbers is, I think, profoundly wrong.”
Words worth
Words, however, can themselves be a problem at the point of sale. “We're at this really messy part of the market’s evolution,” says Hamilton Claxton, “where there's lots of ‘funny’ marketing going on – clients are confused, some fund managers are confused – and regulators want to get their arms around that for good reason.”
Name game
Asset managers that claim to be investing sustainably, and the ESG rating companies that many of them depend upon, are coming under intense scrutiny, as regulators and the press hunt for eye-catching discrepancies between how the sustainability of a company has been assessed by different parties – and between a company's rating and its real-world behaviour. “We're paranoid that sustainable investing becomes perceived as a fad or a bubble,” says Fox, who has spent decades trying to convince people to invest more sustainably. “There are profound social and environmental benefits from sustainable investing,” he says, “so its integrity must not be diluted and discredited.”
Stricter regulatory definitions and disclosure rules are now arriving, but the team wonder if these could prove to be a double-edged sword. “The challenge is whether the regulators can really capture all the nuances of sustainability within those narrow regulatory definitions,” says Hamilton Claxton.
Social spirit
“The way we run our sustainable funds is very much in the spirit of the Brundtland report published in 1987,” she explains, “in that it is all about the net benefit to society and taking a holistic view, rather than targeting the deepest green in purely environmental terms. It’s frustrating that the new EU Sustainable Finance Disclosure Regulation (SFDR), for example, uses a definition of sustainability that, to us, seems in many ways green with a bit of social tacked on the side.”
More broadly, she worries that narrow-band definitions could “stifle innovation and direct capital away from many things society actually wants to direct it towards. Also, it can be hard for mainstream investors to do the most squeaky-clean forms of sustainable investing like impact investing which, if you define and execute them properly, tend to fall into higher risk investment categories such as private equity.”
The EU Sustainable Finance Disclosure Regulation (SFDR), which came into force in March 2021, aims to improve financial industry transparency and consistency on sustainable investments and associated processes, discourage misleading claims about an investment’s sustainability credentials, and encourage the integration of financially material sustainability risks into the investment process. It obliges certain financial market participants to make what can be complex sets of disclosures. It is one of several measures the EU is using to create a common framework for sustainability and to reorient capital flows, with the aim of easing the transition to a more sustainable economy.
What is the SFDR?
Fox says there is a danger that the choice is about to become binary – either an investment or a strategy is, or is not, sustainable – when clearly communicated differences of degree and tone are legitimate.
“At RLAM, we tend towards a broader, more pragmatic manifestation of sustainability,” he says, “in which good ESG standards are equally as relevant in defining a sustainable company as products and services. We also want to invest in companies that are really trying on the social as well as the environmental side.”
Diversity dividend
He argues that choice is a good thing, so long as it is well-informed. “Our sustainable funds will be suitable for some people, while others will want to buy a narrower, more purist, environmentally-focused sustainable fund. We think there is virtue in a diversity of sustainable investing approaches being available – we are not trying to serve everybody.”
Fox sees a market contradiction developing. “As the definitions of sustainability narrow, and reduce the investment universe,” he says, “stocks within that definition will become more expensive, partly because they offer an easier narrative to clients in terms of their sustainability.” But he’s been investing long enough to know there are times you don’t join the crowd.
Subtle success
“Over the next 3-5 years, sustainable funds like ours may need to spend more time finding the non-obvious – the investments that are genuinely sustainable but do not get picked up by simple taxonomies or third-party ESG ratings.” As examples from the team’s recent research, he cites a heating, ventilation and air conditioning (HVAC) company that is trying to decarbonise HVAC with more efficient technology, and a decking company that makes decking out of discarded plastic bags.
“We're planning for what comes next as sustainability matures – as it becomes more subtle, more nuanced, and in some ways more difficult,” he says. “Our bet is that we have the skills, in-house resources and long-standing credibility with investors to look beyond the obvious in the pursuit of both sustainable and financial rewards.”
The views expressed are the contributors’ own and do not constitute investment advice.
For professional clients only, not suitable for retail investors.
6 dRIVERS of change
Sustainable AND RESPONSIBLE investing
Potential implication
Growing need to find credible ‘non-obvious’ sustainable investments?
Could this stifle some forms of sustainable investing?
Can sustainability be captured by numbers alone?
Growing focus on direct impact too?
Investor choice plus investor confusion?
Market growth leading to potential over- exuberance?
Driver 6
Market focus on more ‘obvious’ sustainable investments
Driver 5
Push to closely define sustainability and sustainable investing
Driver 4
Increasing data availability and drive to quantify
Driver 3
Not just ESG-driven financial risk
Driver 2
Proliferation of strategy types
Driver 1
Broad cultural acceptance of sustainability
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explore our summary of the forces now shaping the market
My starting point is that not everything that matters can be measured
The Brundtland Report, sponsored by the United Nations and named after Gro Harlem Brundtland, chair of the World Commission on Environment and Development (WCED), was a milestone in the attempt to build a more sustainable world. Published in March 1987, the report attempted “to formulate an interdisciplinary, integrated approach to global concerns and our common future,” particularly with respect to sustainable development.
March 1987
What was the Brundtland report?
Back up to choices
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
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 responsible investment and good governance across all asset classes. Alongside this, we also believe that
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RLAM’s approach to responsible investment and engagement
Our engagement topics must meet the following criteria:
Meet the needs and expectations of clients
Material and relevant to investment decisions
Has the potential to impact corporate ESG or financial performance or reduce risk
Raises best practice standards within a sector or market
Adds value in advancing thought-leadership and good governance
2020 engagement activity – a snapshot
In 2020, our RI team engaged with over 200 companies on a total of 413 occasions. Our engagement spanned a number of topics, notably on matters related to remuneration, climate transition risk and cyber security.
As RLAM's ESG practice has evolved, we’ve invested in our Responsible Investment team to build our research capability and insights in this area. We are excited at the future direction of our offering, as our approach to responsible investing and our team’s capabilities become ever more advanced.
Meet the team
Mike Fox Head of Sustainable Investments
Mike joined RLAM in August 2013 following the acquisition of The Co-operative Asset Management by the Royal London Group. He is Head of Sustainable Investments at RLAM. Mike became a fund manager in November 2003 when he took over managing the RL Sustainable Leaders Trust. Mike originally trained and qualified as a chartered accountant with Ernst & Young in Manchester.
Featured in this Spotlight
Click on the plus icons for more information
At RLAM, we have embraced responsible investing for many years and continue to expand our offering in line with the evolving world of ESG best practice. In 2020, we expanded our ESG integration practices and now integrate these across all our asset classes.
Engagement & advocacy – a key pillar of this approach
Address a principal adverse ESG impact
Engaging with companies has several aims:
Our engagement priorities
In 2021, our engagement continues to focus around six thematic priorities defined in an earlier 2019 consultation:
Climate risk
The climate is changing. Companies need to prepare for the energy transition and physical impacts of climate change
Governance
Checks and balances. Successful companies need strong boards, appropriate pay, and to be accountable to their stakeholders
Circular economy
Reduce, reuse, and recycle. Companies need to be designing products and processes of the future that don’t hurt our planet
Innovation, technology & society
Technology is advancing, jobs are changing. Companies need to be cyber resilient, tech-savvy, and responsible users of data
Diversity
Avoid group-think. Diverse companies are more innovative and create better outcomes for customers
Social & financial inclusion
Leave no one behind. Companies succeed when everyone has an opportunity to participate and be a productive member of society
Engagement by type
Engagement by geographical region
How does responsible investing fit into our organisational chart?
(1) RLAM as at June 2021
Source.
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 June 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.
Ashley Hamilton Claxton Head of Responsible Investment
Ashley joined RLAM in November 2013 following the acquisition of The Co-operative Asset Management (TCAM) by the Royal London Group. Ashley is responsible for coordinating and overseeing RLAM’s approach to responsible investing across all of our asset classes. She has management responsibility for our company engagement, corporate governance analysis, and proxy voting.
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What are the key components of our responsible investment?
'Responsible investment' is the umbrella term for our approach to ESG integration and stewardship, which covers all our investment teams, strategies and funds.
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
Ashley Hamilton Claxton, Head of Responsible Investment, on her role and the realities of engaging with companies
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.
Do you approach those themes differently to your peers?
We've been championing a just transition in the UK. We worked closely with major UK energy company, SSE plc, the first company globally to publish a ‘just transition’ statement and we are now getting four or five other companies to do the same. We wanted to move the needle forward on an issue that not many investors were working on. I feel we've made real progress in the last 12-18 months.
“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”
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 got an engagement tracker so every time we meet with a company, we put that into a database and assign a progress label. Over time we should be able to quantitatively track our engagement successes. It's really important to articulate to clients what the purpose is of our engagement and whether we are achieving engagement outcomes.
You are hoping to roll out firmwide proprietary ESG ratings later this year – are you taking a different approach to your peers?
We are responsible for four key things. On the one side we've got the stewardship of our investments, which I put into two buckets: ‘engagement and voting’ and ‘engagement and advocacy’. Then on the other side we've got the integration of Environmental, Social and Governance (ESG) approaches, which also falls into two buckets. First, we act as coaches, assistants and chief ESG cheer leaders to the fund managers. For example, we get them the right information, data and analysis and help them to integrate ESG into their investment process. The second bucket is product development. This is a big area of change: we are much more involved in product development than we ever were – for example, helping design low carbon products in buy-and-maintain credit and global equities.
What does the responsible investing team do and how is that evolving?
The technology in society theme offers all sorts of tricky issues that Mike Fox, our Head of Sustainable Investments, and I talk about a lot. At what point are technology companies part of the problem and not part of the solution? How might AI algorithms affect people's ability to get insurance or their human rights? Our approach to this theme is not wholly developed but it is something we are committed to tackling.
Which theme is looming larger on your radar now than a year ago?
How are you tracking engagement success and communicating that to investors?
It’s also important to communicate the reality that some engagements take years. When I first started my career, we were looking at mining and human rights in a gold mining company. We helped to persuade them to conduct one of the earliest human rights impact assessments by a company. But it took five years – if we’d reported on that quarterly, progress would have looked minimal. There are quicker wins, of course, but we should be honest with our customers: real engagement that makes a difference is often a slow burner.
What else do you think investors need to understand about engagement?
1: On the one side we've got the stewardship of our investments, which I put into two buckets, the first of which is ‘engagement and voting’
2: The second stewardship activity can be thought of as ‘engagement and advocacy’. Then on the other side we've got the integration of Environmental, Social and Governance (ESG) approaches, which also falls into two buckets.
3: First, we act as coaches, assistants and chief ESG cheer leaders to the fund managers. For example, we get them the right information, data and analysis and help them to integrate ESG into their investment process.
RLAM’s responsible investing team has four key activities, says Ashley Hamilton Claxton
Click on the icons to discover each activity
WHAT DOES THE RESPONSIBLE INVESTING TEAM DO?
4: The second bucket is product development. This is a big area of change: we are much more involved in product development than we ever were – for example, helping design low carbon products in buy-and- maintain credit and global equities.
Then on the other side we've got the integration of Environmental, Social and Governance (ESG) approaches, which also falls into two buckets.
RLAM’s engagement priorities include building a more circular economy in which resources are reused and recovered
4: The second bucket is product development. This is a big area of change: we are much more involved in product development than we ever were – for example, helping design low carbon products in buy-and-maintain credit and global equities.
