By Susie Jackson, head of investment advisory, Kleinwort Hambros, Channel Islands and Gibraltar
RESPONSIBLE investing is perhaps the most significant movement in the investment industry for a generation, yet the lack of a single, clear definition risks undermining its importance.
For investors who want to harness the power of their capital to effect positive change, the vast array of definitions can be confusing, if not discouraging. For example, opting to invest according to the principles of ‘ethical investing’ overlooks the benefits of ‘sustainable investing’. Similarly, ‘environmental, social, governance investing’ misses out on the rewards of ‘impact investing’.
The Principles for Responsible Investment is defined as a strategy and practice to incorporate environmental, social and governance factors in investment decisions and active ownership.
There is growing recognition in the financial industry and academia that ESG factors can affect risk and return. There is also heightened demand from investors calling for greater transparency about how and where their money is invested. In addition, there is growing awareness that ESG factors influence company value, returns and reputation by an increasing focus on the environmental and social impacts of the companies in which they are invested.
Finally, responsible investing regulation has increased significantly since the mid-90s, driven by realisation among national and international regulators that the financial sector can play an important role in meeting global challenges such as climate change, modern slavery and tax avoidance.
According to the Investment Association, the trade body for asset managers, £7.8 billion was placed in responsible investment funds between January and October 2020, accounting for almost half of all net money placed into funds. This is four times higher than in the same period in 2019 and the IA describes it as a ‘real shift in savers’ priorities’.
In October 2020, over £1 billion was placed into responsible funds – the highest monthly total on record*. The pandemic probably added to this trend as the coronavirus-induced lockdowns impacted human activities and, in turn, energy use and carbon-dioxide emissions.
In the first half of 2020 there was an abrupt 8.8% decrease in global CO2 emissions compared to the same period in 2019. The magnitude of this decrease is larger than during previous economic downturns or the Second World War.
By 1 July, the pandemic’s effects on global emissions diminished as lockdown restrictions relaxed and some economic activities restarted, especially in China and several European countries. However, substantial differences persist between countries**.
However, what about performance? Is there a cost to investing responsibly? The answer to that is potentially ‘yes’ for several reasons: less diversification until satisfactory solutions become available for real estate, commodity and hedge fund investments, concentration risk, lack of exposure to certain sectors such as energy – that may go on to outperform – and potentially higher costs of implementation.
Five years of historical performance data, however, suggests otherwise, showing that responsible investing should not lead to underperformance. There are, indeed, good reasons why companies that embrace responsible practices may outperform companies that do not. For example, such companies may benefit from favourable tax environments, lower costs of capital and higher sales as momentum continues to build in favour of responsible businesses. Furthermore, integrating ESG research may identify risks that are not evident in financial statements. All else being equal, this should lead to greater profitability and share prices.
At Kleinwort Hambros, we aim to demystify responsible investing, while combining the strengths of all conventional approaches. Specifically, our proposition incorporates the merits of ethical, ESG, sustainable and impact investing. From the exclusion of sin stocks to the direct influence of impact funds, we have adopted techniques spanning the spectrum of responsible-investing principles to craft a unique holistic offering solely for our clients.
Client demand for responsible portfolios will only increase in the coming years and, at Kleinwort Hambros, we are now analysing the carbon impact of our portfolios, ensuring that those constructed are even more sustainable. We recognise that responsible investing is an imperfect practice, ever-evolving and complex. However, we have made clear commitments to be a responsible bank, in its widest form.
Kleinwort Hambros is a proud signatory of both the UN-supported Principles of Responsible Investment and UK Sustainable Investment and Finance Association.
Kleinwort Hambros has offices across the UK mainland as well as offshore in Guernsey, Jersey and Gibraltar. We have experienced investment professionals, client relationship personnel, and dedicated support teams. We are confident and proud of our ability to offer a first-class, modern, full-service wealth management experience that is adapted to the needs of a wide range of client situations.
SG Kleinwort Hambros Bank (CI) Limited is regulated by the Jersey Financial Services Commission for banking, investment, money services and fund services business. The company is incorporated in Jersey under number 2693 and its registered address is PO Box 78, SG Hambros House, 18 Esplanade, St Helier, Jersey JE4 8PR.
Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest. Changes in inflation, interest rates and the rate of exchange may have an adverse effect on the value, price and income of investments.
Information herein is believed to be reliable but the Kleinwort Hambros Group does not warrant its completeness or accuracy and it should not be relied on or acted upon without further verification. The Kleinwort Hambros Group disclaims any responsibility to update or make any revisions to this document. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. As such, the Kleinwort Hambros Group, Societe Generale and its other subsidiaries shall not be held liable for any consequences, financial or otherwise, following any action taken or not taken in relation to this document and its contents.