PI: Engagement is a big part of ESG, but does it lead to change? Mason: It is unquestionable that engagement works. It is time to move on from a question like that. There is academic evidence that it works. For people who have been doing it for a long time, there is demonstrable evidence. We have put more effort into engagement on climate change than anything else. Not many people would have believed five years ago that we could get the oil and gas sector to where it is now. I am not say- ing that it is the end point where we need companies to be, but that would not have happened without shareholder engagement.
It would also not have happened without other pressures in society, whether it’s civil society pressure, regulatory pressure or just a growing sense of climate crisis and the need to respond. Shareholder engagement has an impact, but there are still not enough players and we need everyone to be exercising proper stewardship with their investments. Werf: Royal Dutch Shell is an example of a company joining with Robeco, the Church of England and a few other large shareholders to make a joint statement on their long-term ambitions and shorter-term targets. That is a clear case of the change that shareholders can make.
I have been speaking to the chief sustainability officer of a large global food and beverage company for several years. Early on in our discussions they moved the responsibility for obesity to their customers, but now they have acknowledged the need to change. They have committed to reducing sugar in their recipes, and are looking at broader sustainability issues such as improving water management and reducing plastic. Ramscar: It is clear that engagement gets companies to change. Unilever would have left the UK if we had not stepped in. Does it deliver system-wide change, particularly on climate change? Not on its own.
PI: Do investors have to sacrifice a return to invest responsibly? Bhatia: If we are investing in an ethical or socially responsible fund, the returns are market returns, generally speaking. When we get into private markets, it’s a mixed bag. That’s where we tend to focus on catalytic- focused investments. We have found some impact investments which can deliver private equity-type returns, but there is also a group of emerging managers focused on local communi- ties. They tend to be small-scale funds that aim for sub- commercial returns. We have been flexible in our approach. We have gone for the commercial returns and where returns have been bor- derline.
Czupryna: It boils down to the investor’s perspective. ESG is a large toolbox and if it means excluding a whole bunch of sectors then it is hard for anyone to guarantee that a portfolio will outperform over the medium term. Long term is another question. Excluding tobacco makes sense if you have a long-term perspective, because the sector is knowingly killing people, so it is hard to argue that has a long-term future.
As long as the ESG factors being considered are financially significant for the company, it makes financial sense to integrate ESG into an investment as it is going to help deliver superior returns. Werf: Our quantitative researchers looked at the sin stock anomaly, at why tobacco and gambling stocks deliver attractive returns. We found that a lot of these companies have the quality factor. If you take a factor approach in a quantitative portfolio, switching tobacco stocks for other quality stocks makes up for that sin stock exposure. This kind of research is something we are looking to use more on a broader set of ESG topics, looking more to the factor exposure that you are willing to screen out.
18 November 2019 portfolio institutional roundtable: Responsible investing
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