UK investors are increasingly willing to take a longer-term view on environmental, social and governance (ESG) investments, according to Schroders’ Jessica Ground.
The asset manager’s global head of stewardship said the latest Schroders’ survey of investors revealed that not only are attaching greater importance to ESG within their portfolios, it is increasingly seen as a long-term strategy.
“In our 2017 survey of UK investors 67 per cent stated that sustainable investing has become much more important to them over the past five years, 5 per cent said that they have increased their allocation,” she said.
“Another really encouraging theme that came out of our study was that people were much more willing to hold on to sustainable investments for longer – on average, two years longer – which helps all of us.”
However, Ground noted that in previous editions of the survey had highlighted a big gap in sentiment between investors and advisers.
“It might be a bit like religion and politics: we are not broaching the question of sustainable investments with our clients but actually this is something that is quite important to them,” she said.
Schroders 2017 Global Investor Study trends
Source: Schroders
The reasons for the increasing popularity of sustainable investing, according to Schroders’ head of stewardship, is that companies are facing growing challenges and headwinds, including stricter regulation and more environmental issues.
These factors, Ground said, make sustainable investing a “perfect storm” that ticks many boxes: “It is getting tougher out there: the idea that you can just buy a group of companies and forget about them is long gone.
“The average tenure in the S&P 500 has dropped from 50 years to under 15 years and that isn’t only because the likes of Apple have come up.”
She added: “We are seeing more regulation and more controversies, more headwinds for companies, which is making it harder for them to survive.”
As such, Ground noted ESG issues have never been more important for business models.
“We are facing global challenges,” she said. “We have been very vocal about the fact that we actually think we are on course for global warming to go to four degrees, which is twice the levels that scientists believe are safe.
“There is also regulatory scrutiny: we have seen this very much in the defined contribution pension space but it is starting to come over at a European-wide level, so it is really about integrating sustainability explicitly into fiduciary duty and more pressure on you to question your beneficiaries about it.”
Ground also acknowledged the sustainable investing also has its challenges, including scepticism from professional investors.
“Performance concerns remain the over-riding issue, but lack of transparency in performance data and difficulty in managing the risk are all serious hurdles that we need to overcome, and ones that we have been thinking about quite deeply here.”
In order to overcome those obstacles, Ground (pictured) said helping clients understand what sustainable investing means is key, as being knowledgeably aware of the character of ESG means “maturing”.
She said: “One of the things I think is very important is that we actually go back to the clients and really think about what they mean when it comes to sustainable investing.”
“The UK results from our 2017 study show that only 21 per cent feel that sustainability is about negative exclusions and 40 per cent are interested in best in class.
Source: Schroders
“But what was really encouraging is that 50 per cent of respondents believe that sustainable investing is about investing in companies which are proactive in making sure that they are well-prepared for environmental and social changes.”
The Schroders’ global head of stewardship added: “There is a real opportunity that we have with this growing interest in sustainable investment to deliver products that can work for fund managers and beneficiaries to deliver sustainable investment outcomes.”
Ground noted the clients’ growing will to step back from opportunistic situations and being more responsible can be seen in the demand for longer term ESG products and has resulted in the launch of ESG funds such as Schroder Responsible Value UK Equity, which is overseen by Kevin Murphy, Nick Kirrage and Andrew Lyddon, managers of Schroders’ value team.
“For these funds that we are launching typically we are looking for them to outperform over five years, but we are not looking to compromise the alpha generation or the fundamental active equity process,” she said.
“Some of you might be surprised that our UK value team is one of the teams that has launched one of these funds, but ESG in understanding risk is a huge part of how they manage money.
“They felt that there was an opportunity in a space that tends to be dominated by quality to bring a responsible value solution,” Ground explained.
Performance of fund over 5yrs
Source: FE Analytics
Over five years, the £96.8m fund has delivered a total return of 61.01 per cent, outperforming the average IA UK All Companies sector peer’s 57.69 per cent gain and a return of 51.05 per cent for the benchmark FTSE All Share index.
One of the reasons Schroders have invested so much in building its sustainable approach is that it can give a better investment insight and a better understanding of how the world is changing
“We are investing in those companies that can stay around for the next 50 years rather than being kicked out of the S&P [500],” she explained.
“That will really help us to deliver alpha for you and for clients. Active ownership has never been more important.”