The momentum for sustainability is unstoppable.
Overseen by international institutions, fostered by consumer demand, legislated by national governments and embraced by corporations, sustainability and responsible investing are now firmly established as part of the modern narrative.
Forward-thinking leaders such as BlackRock CEO Larry Fink understand the importance of investing in progress, Fink famously declaring that carbon-intensive companies needed to lift their game or be dumped by the world’s largest fund manager.1 But how do fund managers decide which companies to invest in?
Six Black Pens attended an engaging discussion on this topic at the recent Lonsec Symposium. Moderated by Tony Jones, Head of Sustainable Research at Lonsec, the specialist speakers were Jessica Cairns, Head of ESG & Sustainability at Alphinity, and Crispin Murray, Head of Equities, at Pendal Group. What could we learn?
Framing a sustainable investing strategy
First up, Jessica Cairns outlined how, as part of the assessment process, her ESG team values practical experience – such as site visits and supply chain tours – along with detailed analysis and commentary around sustainability themes and ESG topics.
In terms of a framework for a sustainability strategy, Ms Cairns showed how Alphinity uses the United Nations Sustainable Development Goals (SDGs) as its benchmark. That is: 17 interconnected and agreed-upon goals, ranging from No poverty to Clean water and sanitation to Responsible consumption and production.
Ms Cairns explained that Alphinity uses SDGs as “a framework to assess the positive and negative contribution of companies’ services towards a sustainable future and arrive at a net score”. This ensures that the company has aligned its investment choices with a globally recognised agenda.
“Sustainability is a grey area, so it’s very important to weigh up the pros and cons.”
Jessica Cairns, Head of ESG & Sustainability, Alphinity
Four stages to investment
Ms Cairns then outlined her ESG team’s four-stage sustainable investment process:
1. Positive sustainability
That is, net positive alignment with UN SDGs, while excluding activities that don’t align (e.g., fossil fuel production).
2. Minimum ESG criteria
This includes in-house ESG risk assessment, with the highest level of four (Avoid) resulting in exclusion from all funds.
3. Sustainable Compliance Committee
This committee includes two external experts, while also approving the sustainable universe.
4. Attractive financial returns
This involves applying the Alphinity investment process to the sustainable universe to arrive at a portfolio of quality undervalued companies experiencing positive earnings surprise.
“Having a clear governance structure gives investors the comfort that there is rigour on the decision-making around which stocks end up in the funds.”
Jessica Cairns, Head of ESG & Sustainability, Alphinity
The conundrum of sustainable investing
Crispin Murray, Head of Equities at Pendal Group, began by talking about the conundrum of sustainable investing.
“At a top-down level, sustainable investing sounds pretty straightforward. You’re looking to invest in companies that do good for society and operate in a sustainable way. At the same time, you’re investing other people’s money; people who are actively choosing to invest in a sustainability fund because they believe passionately in that issue. You then have to overlay that with two other factors: you need to be true to label and you need to deliver returns. So all of these issues end up complicating it.”
Five key objectives of a sustainability strategy
- Avoid industries not consistent with investor values: that is, industries that are causing harm.
- Choose investments that make society better and don’t harm the future: that is, companies that are doing good or helping to facilitate the transition to a more sustainable economy.
- Advocate on investors’ behalf, engaging to improve companies: actively advocate to encourage and accelerate change.
- High conviction investing: in order to ensure good long-term returns.
- Good long-term returns: how to achieve this from sustainable investing.
“You’re investing other people’s money; people who are actively choosing to invest in a sustainability fund because they believe passionately in that issue.”
Crispin Murray, Head of Equities, Pendal Group
Assessing stocks to own and avoid
Mr Murray then illustrated one way that Pendal Group assesses stocks is by categorising them into EXCLUDED, STOCK-BASED ASSESSMENT and TARGETED, with example stocks.
EXCLUDED – criteria for exclusion:
- Sells products causing harm (fossil fuels, gambling), labelled as group 1
- Provides direct services to group 1
STOCK-BASED ASSESSMENT
- Provides indirect services to group 1 (financial institutions)
- Consumes fossil fuels in delivery of product (manufacturers, airlines)
- Neutral contribution to transition (supermarkets)
TARGETED
- Enablers of transition (telcos, tech companies)
- Leaders of transition (medical tech, software)
“There’s a lot of nuance in terms of assessing.”
Crispin Murray, Head of Equities, Pendal Group
Opportunities tied to economic transition
Mr Murray emphasised in the discussion that one of the key roles of global investment management businesses such as Pendal Group is to actively engage with and encourage companies along the sustainability path. This can lead to new opportunities for businesses as they set about adapting. He broke this down into:
Leaders of transition
- Businesses transforming industries and the economy
- Companies with industry-leading practices
Enablers of transition
- Facilitators of the transition to a more sustainable economy
What were some of the key take-outs?
It’s clear from the discussion that investing in sustainability is far from black and white. While the two presenters highlighted some of the differences in how their companies approach sustainable investing, there was common ground. For Six Black Pens, our key take-outs were that investment management companies should:
- Have a clear framework for analysing and assessing the companies they invest in
- Avoid industries not consistent with investor values
- Have a clear and transparent governance process
- Actively engage companies to encourage sustainability progress
- Never lose sight of the overarching investment goal – delivering good returns!
We’ll leave the last word to Mr Murray.
“When it comes to investing in sustainability, you can make money. There are lots of opportunities.”
Crispin Murray, Head of Equities, Pendal Group
1. AFR: BlackRock issues ultimatum on net zero. January 27, 2021.
SBP would like to thank Tony Jones, Jessica Cairns, Crispin Murray and all speakers and presenters at the Lonsec Symposium 2023.
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