Putting some heart into a portfolio can be good for returns

Valentine's Day is not the only day for caring. Investing in companies that have a positive impact on the environment or society can help to generate better returns

Profit-driven businesses have traditionally had a reputation for caring about little else than their bottom line and seldom have their shareholders either. However, growing awareness of social and environmental issues has nurtured a generation that expects greater responsibility from brands.

Consequently, the reputational risks for companies that treat customers, staff and the planet badly are higher than ever, while the potential rewards for businesses able to build mutually supportive relationships with all their stakeholders have increased.

This Valentine’s Day is a good time to reflect on why showing love for the environment and society through your portfolio can make good investing sense. Though sustainable investing has been on the rise for some time, the pandemic has put a spotlight on companies’ wider impacts on communities and the environment.

Millennials are particularly focused on these issues, with 83 per cent telling a recent study by 5WPR they want companies to align with their personal values. In a survey by GfK, in the midst of last year’s George Floyd protests, which gave brands their most profound glimpse yet into the growing importance of social responsibility, three in four Americans said how businesses behaved during the Black Lives Matter protests would affect their desire to deal with them.

Such findings illuminate the striking realisation many companies are coming to that environmental, social and governance (ESG) issues are about more than ticking boxes and appeasing stakeholders. In the most extreme circumstances, of which a pandemic is one, it can be the difference between survival and extinction.

But with so many ESG issues to be aware of – from carbon impact to diversity and inclusion, executive pay, social responsibility, health and safety, and everything in between – how can boards and management teams stay on top of it all?

“The high performers are more advanced on ESG because they really understand the material impacts on their business and therefore provide the right detail, where it matters, to illustrate to investors the steps they’re making,” says Matt Evans, portfolio manager at global asset manager Ninety One’s UK Sustainable Equity Fund.

“Those that just pay lip service to ESG and take a broad-brush approach to tick boxes, meanwhile, are falling behind. You have to zero in on the material impacts of your own business.”

Though it is, of course, a generalisation, Evans has observed a correlation between ESG rating and how companies have fared through the pandemic. “We’ve seen a dislocation in performances,” he says. “Companies delivering products and services that are deemed as providing a benefit to society or the environment are seen more positively by investors when assessed for future growth opportunities.

“Those with a measurable negative impact, either societally through creating poor health or when it comes to carbon impact, are having a tougher period; the world is going through a transition.”

While companies are undoubtedly still predominantly assessed on their financial value, investors are increasingly paying attention to how that value is created and also to stakeholder management. This has been highlighted by the pandemic and the decision by many organisations to return furlough money having realised they have managed better than they were originally expecting.

Those with a measurable negative impact, either societally through creating poor health or when it comes to carbon impact, are having a tougher period; the world is going through a transition

As well as measuring companies based on ESG-related metrics, Ninety One also actively engages with executive teams on issues that matter to society, of which furlough has been one.

“Not everyone has got it right, but if you take it across the board, we’ve been encouraged by how the listed peer group has managed furlough,” says Evans. “I take it as a sign these companies are high performers in what we call ‘internal sustainability’ and that they exemplify what we’re looking for in the UK Sustainable Equity portfolio. I think it will also give them a better chance of coming through what could be a difficult time in the months ahead and bouncing back when something like normality resumes.”

The UK Sustainable Equity Fund aims to allocate capital to companies that make a positive social or environmental impact as well as achieve strong financial performance. Crucially, Ninety One recognises the two areas as interlinked because businesses acting responsibly and supporting the transition to a more sustainable future are more likely to generate higher financial returns.

Indeed, since inception in December 2018, the fund has returned 19 per cent per annum, outperforming the FTSE All Share Index and IA UK All Companies sector in both 2019 and 2020,* while its portfolio firms also widened healthcare access in 100 countries, facilitated £6.5 billion of loans to small and medium-sized enterprises, and avoided nearly seven million tonnes of greenhouse gas emissions.

To build a resilient UK equity portfolio, the fund assesses companies across three key pillars of sustainability. Financial sustainability is the traditional investment metric, but it is increasingly underpinned by the second pillar: internal sustainability. This looks at how a business operates, makes efficient use of its resources, looks after its people and interacts with stakeholders. The final pillar is impact, examining how a company’s products and services contribute directly and positively to a more sustainable future.

“What we’re looking for is the interaction across the pillars and for companies that have good metrics in all three,” says Evans. “We then look to intentionally allocate capital to those companies where we can measure the positive impact they’re having on the world around them as well.

“By assessing all those areas, we’re able to focus on companies that have a great opportunity to deliver good financial returns, while also contributing towards a more sustainable future. Equally, for companies with negative social or environmental impacts, the risks to their financial models can be significant.

“If it’s a distribution company, we’ll look at what they are distributing. Is it products that can really improve the outlook for the environment by using more environmentally friendly packaging, for instance? There are packaging companies that are very focused through their own business on ensuring great sustainable and recyclable packaging that is less carbon effective and more tied into a circular economy.

“We look to differentiate on that basis to select well-positioned companies whose end-products and services are genuinely helping to deliver a more positive outcome for the environment or society.”

Disclaimer: All investment involves risk. Sustainable, impact or other sustainability-focused portfolios consider specific factors related to their strategies in assessing and selecting investments. As a result, they will exclude certain industries and companies that do not meet their criteria. This may result in their portfolios being substantially different from broader benchmarks or investment universes, which could in turn result in relative investment performance deviating significantly from the performance of the broader market.

Calendar yr performance % of Fund and FTSE All Share Total Return (Benchmark) 2020: 8.5 (-9.8) 2019: 33.6 (19.2). Past performance is not a reliable indicator of future results. Losses may be made.

*Source: Morningstar as at 31.12.20. NAV based, (net of fees, excluding initial charges), total return with net income reinvested where applicable, in GBP.  The Fund is a sub-fund of the Ninety One Funds Series range (series i - iv) which are incorporated in England and Wales as investment companies with variable capital. Ninety One Fund Managers UK Ltd (registered in England and Wales No. 2392609 and authorised and regulated by the Financial Conduct Authority) is the authorised corporate director of the Ninety One Funds Series range. This communication is not an invitation to make an investment nor does it constitute an offer for sale. Any decision to invest in the Fund should be made after reviewing the full offering documentation, including the Prospectus, which sets out the fund specific risks. Fund prices and copies of the Prospectus, annual and semi-annual Report & Accounts, Instruments of Incorporation and the Key Investor Information Documents may be obtained from www.ninetyone.com.


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