Sustainability is here to stay and will be incorporated in business decisions.
If a company is making profit at the expense of its workers or practises open dumping of wastes: it is no longer considered sustainable by today’s standard.
There is an awareness among the community that sustainability is not a theoretical but business strategy question.
Investors would want to acquire companies that are sustainable. Not surprisingly, the level of awareness has increased significantly compared with five years ago.
Schroders is leading the charge on sustainability. It has a sustainability team for more than 20 years starting from one person to 17 people currently.
“We are getting questions from across the board, nearly all investors are focused on being sustainable – it may mean different things to different people, but it matters. Investors want to know how environmental, social and governance issues are being managed within this fund, ” says Schroders head of sustainable research Andrew Howard.
“Sustainability is not something particularly new for us. Over the years it has become more systematic, robust and we have established more framework.”
It is no longer a niche issue, it has become embedded in the business. It is a basic question about how a company makes money whether it is a sustainable business.
Sustainability is also about asking different questions for the investments that we make. Environmental, social and corporate governance (ESG) is not a compliance exercise. What drives profitability, share price and value? What makes companies successful? It is becoming more complicated and diverse.
Companies have to deal with climate change and equality besides minimum wages, pollution and regulations.
Issues such as climate change and equality which were not a mainstay for investors, are having a very real impact on industries and companies.
For example, a company is successful in the long run if it has the ability to attract talents and motivate its workforce. It should also be able to maintain its customer base by selling the relevant products.
“What that we are trying to do with our sustainability investment is to gauge whether a company is doing those things in a sustainable manner and whether it will last in the long run, ” said Howard.
“Is the company meeting the expectations of society? Consumers are increasingly influenced by the impact on the environment and society. Companies have to respond to these environmental and social trends if they are going to attract talents, ” explains Howard.
Schroders recognises the impacts and risks in making its investment decisions.
More clients are also looking for specific funds that incorporate the sustainability criteria. The number of such investors is growing quickly.
“There is a demand for products from investors, and they want the products to be made based on how they view the world and the concerns they have about the world. So we must have a framework to identify the companies.”
Howard’s department works in tandem with Schroder’s fund managers and analysts to define sustainability for a particular sector, identifying the potential companies.
“Two companies may look the same in terms of profits, but the question is how are they making the money?”
One of the companies may be operating in an unsustainable manner by underpaying its workers or engaging in borderline illegal activities. The other company that practises sustainability will have a better chance of remaining profitable.
“It is a question of how they are making that money not how much are they making, ” says Howard.
For example, a company is operating in an unsustainable manner if it is causing air pollution and therefore putting its operating licence at risk.
“This is because governments and societies are not willing to allow companies to operate with these social cost.
“Companies with business models that are damaging or creating a cost to society, will be increasingly vulnerable over time, ” explains Howard.
Unsustainable companies would include tobacco producers. For the industry as a whole, there are significant threats. Valuations of tobacco companies have already come down.
The same can be said for businesses involved in alcohol, gambling, carbon emissions and water pollution besides oil and gas companies also facing the same threat.
“If we are going to hit the global emission targets that were set out by global leaders in Paris by 2050, the oil industry will have to be significantly smaller a few decades from now, ” said Howard.
“These companies can start to adapt but are they preparing for that change?”
Moving forward, Howard sees innovation ideas within the sustainable field growing.
He says there will be more ideas and innovation, as well as new ways to tackle the question of how sustainable a company is operating.
Meanwhile, Schroders has announced its commitment to integrating ESG across all of its investments by 2020.
Schroders’ Sustainability Accreditation, which was launched by the firm in 2017, encompassed more than 50% (£230bil) of its assets. Schroders has targeted covering 100% of its funds by the end of 2020.
The accreditation – which spans ‘Screened’, ‘Integrated’, ‘Sustainable’ and ‘Impact’ categories – helps Schroders’ clients distinguish how ESG factors are considered across its products.
It is intended to enable clients to understand the different roles that ESG plays in the investment process and will be documented in the funds’ respective factsheets.
‘Screened’ funds actively exclude certain activities from their portfolios, while ‘Integrated’ funds routinely and robustly consider ESG factors throughout the investment process.
Furthermore, ‘Sustainable’ funds seek to identify the best-in-class sustainable companies and the ‘Impact’ accreditation highlights funds whose main goal is to achieve specific and measurable ESG impacts.
Jessica Ground, global head of stewardship, Schroders says: “We know the value that investment can create for society. That’s why we seek to integrate ESG considerations into our research and overall investment decisions across investment desks and asset classes.
“As an active manager, we see sustainable investment as an integral and necessary part of our responsibility.
“Our clients are increasingly asking for ESG to be embedded into their portfolios and, in turn, we are also constantly seeking to improve how effectively we integrate ESG across Schroders’ investment desks. It is not just a tick-box process.”
Earlier this year, Schroders’ commitment to responsible investing was recognised with the highest accolade for the fifth consecutive year.
The Principles for Responsible Investment (PRI), an influential United Nations-backed global investor initiative, awarded Schroders with an A+ rating for its overall strategy and governance in relation to sustainable investment.
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