Mainstream investors are now adapting SRI investment techniques to help satisfy their clients’ overriding need for good financial returns. EP talks to Neil Brown, head of governance and responsible investment at Threadneedle, about how this works in practice
At 8.30am each weekday, a small group gathers at Threadneedle
Investments in the City of London to review the latest developments
that may affect the value of its European and UK holdings. Threadneedle
has total assets under management of £72.2billion ($144bn) on behalf of
institutional and retail investors. For half an hour, analysts and
researchers chew over financial information, AGM updates, broker
research, and press reports. Among them sits Neil Brown, Threadneedle’s
head of governance and responsible investment.
‘My role at these meetings is to provide feedback on any governance or
socially responsible investment news,’ he says. ‘Generally it’s a mix
of corporate governance issues and socially responsible investment.
Last month, for example, we discussed Tesco’s latest results and their
ethical consumer approach.’
The meetings lend themselves more readily to consideration of corporate
governance than SRI issues, the latter tending to affect the value of
companies over a longer term. But Threadneedle seeks to incorporate
social, environmental and ethical concerns into the review of all its
investments – something that only a handful of mainstream investment
managers attempt at present. ‘We routinely feed the SRI and governance
information we gather on equities to the pan-European equity teams
within Threadneedle. Our views will be known to the bond teams too.’
Threadneedle does not boycott tobacco or arms makers. ‘We don’t
exclude, but focus on SRI issues that will impact on earnings. If it
has nothing to do with returns, then it may be interesting but as far
as we are concerned it is not SRI. We are here to make money for our
clients and we do this by focusing on what is material. Management of
the risks and opportunities presented by social, environmental and
governance factors is integral to our investment decision-making
process.’
Review of a particular company will often be prompted by a low
assessment from an SRI ratings agency or sell-side analyst. ‘If, say,
Innovest had a triple C rating for a stock, that would have triggered
an SRI performance review. My job is to find out what is driving the
low rating and whether it is material to the stock price.’
The information-gathering includes the views of sell-side analysts at
Citigroup and Deutsche Bank. Brown and Threadneedle’s researchers also
talk to company CSR teams and other interested parties. ‘In an ideal
world I wouldn’t be needed because these things would have already been
identified as material and so looked at by our sector analysts. But SRI
is in a transition phase, and I am an intermediary. If the sector
analyst thinks SRI is not material to the value of a stock, one of us
has got the wrong idea of what is material. So the focus is always on
SRI issues that will have an impact on earnings.’
Threadneedle is shifting its approach in this area. ‘Rather than
knowing a little about a lot, we are focusing on a small number of
stocks that we believe have potential, for example identifying 20–50
companies that can really benefit from climate change and then feeding
that information to all our investment managers.’
This approach is applied both to product areas, such as biofuels, and
to industry sectors. Brown and his colleagues have recently met mining
companies to build up a detailed picture of the likely winners and
losers. ‘A great deal of engagement goes on, but the outcomes are not
widely known because it goes on behind closed doors – and those doors
are closed for a reason. There is real commercial advantage to the
company in having shareholders apply that pressure in private. It often
relates to opportunities, not risk management. SRI engagement enables
us to identify a stock where we think there is value but also a clear
impediment to releasing that value.’
Investor engagement forces companies to make the business case for
their CSR activities. Brown cites the example of a mining company’s
cost-benefit analysis of its HIV/Aids programme. ‘That sounds callous,
but it’s presenting the business case, which within companies is the
biggest single driver of change.’ But what of unquantifiable risks and
opportunities? ‘It’s the approach that counts. Marks & Spencer may
not be able to say what percentage of its new footfall is coming from
its advertising campaign rooted in responsible business practice, but
it is part of a coherent strategy – and the stock is now doing well,’
says Brown.
The stress on materiality is unlikely to endear Threadneedle’s stance
to all ethical investors. Conceivably, companies making money because
the costs of the pollution they cause are not borne by the business
could be excellent investments. Brown claims that ‘if a company
conducts itself inappropriately, its earnings will be materially
impacted. Take child labour in the retail sector – companies involved
are highly likely to be caught out at some point.’
Threadneedle is taking a pioneering look at incorporating
environmental, social and ethical issues into mainstream investment
decision-making. The carbon footprint of Threadneedle’s UK Fund, as
measured by the environmental research company Trucost, however, is one
of the largest among UK investment funds. Threadneedle’s disclosure
practices are also weak. This puts it in a similar position to many
companies in which it invests: doing interesting work, but open to
challenge.
