IFA Magazine | ESG Round Table London

Februar y 2020

ESG ROUND TABLE LONDON

CE

al

cu

l us C a p

i

e

FI

RS

T APPROV

ND

FU S

ch

YEARS

EI

C

20

l aun

d

RA LE B T I NG l ta

Invest in the UK’s most exciting entrepreneurial businesses and benefit from generous tax reliefs

ED

Calculus Capital is celebrating its 20th year, as a multi-award winning leader of tax efficient investment.

The Calculus EIS Fund and Calculus VCT invest in businesses with strong growth potential, over a range of sectors with good quality management teams.

To find out more get in touch on: info@calculuscapital.com, 020 7493 4940 or visit www.calculuscapital.com

Before investing in the Calculus VCT or Calculus EIS Fund, you should read their respective Prospectus and Information Memorandum carefully and take professional advice. EIS and VCT are long term investments, and their value can fall as well as rise. Any person making a subscription to the VCT or EIS Fund must be able to bear the associated risks.

Februar y 2020

PARTICIPANTS Wayne Bishop

Harry Merrison

Director of Ethical Investing, King & Shaxson Ethical Investing

Investment Manager, Kingswood Group

T: +44 (0)20 7426 5968 E: wayne.bishop@kasl.co.uk

T: 020 7293 0734 E: Harry.Merrison@Kingswood-Group.com

Adrian James Mackenzie

Julia Dreblow

Director, Whiting and Partners Wealth Management Ltd

Director, SRI Services

T: 01945 581937 E: adrian@whitingandpartnerswm.co.uk

T: 07702 563702 E: Julia@sriServices.co.uk

Anastasia Grimaldi

Julian Barnard

Senior Investment Manager, Charles Taylor Investment Management Company Limited

Principal, Barnard Lee Associates

T: +44 20 3320 2311 E: Anastasia.Grimaldi@ctplc.com

T: 0207 627 4791 E: Julian@Barnardlee.co.uk

Belinda Thomas

Ketan Patel

Partner, Triple Point

Chartered Financial Planner, Prerak Financial Services

T: +44 (0)20 7201 8989 E: belinda.thomas@triplepoint.co.uk

T: 07771 997857 E: ketancfp@gmail.com

Ben Constable-Maxwell

Mike Daniels

Head of Sustainable and Impact Investing,

M&G

Director, Kingswood Consultants Ltd

T: +442039772284 E: ben.constable-maxwell@mandg.co.uk

T: 01869252545 E: Mike@kingswoodconsultants.com

Alex Sullivan Managing Partner, Clifton Media Lab T: 01173258328 E: alex.sullivan@ifamagazine.com

I FAmagazine.com

3

Februar y 2020

ESG ROU N D TABLE

IS ESG AND RESPONSIBLE INVESTMENT SET TO ROAR IN THE TWENTIES? As we begin the decade of the twenty twenties, is ESG investing set to roar? What exactly do we mean by ESG? How far have we come towards achieving greater standardisation of terminologies when it comes to ESG and responsible investing?

A

s we begin the decade of the twenty twenties, is ESG investing set to roar?

What exactly do we mean by ESG? How far have we come towards achieving greater standardisation of terminologies when it comes to ESG and responsible investing?

At the IFA Magazine ESG roundtable discussion which was held last autumn in London, participants kicked off the discussion by focusing on the terminology involved and looking at how ESG often seems to mean different things to different people. There is little doubt that offering investments which are driving change is seen in a different light now. This is no longer optional for fund managers, it’s a necessity.

Julia Dreblow is a specialist when it comes ESG investing. She runs her own business which is primarily focused on providing information on ESG or ethical investment funds. She agreed that ESG is often used as an umbrella term which covers a wide spectrum of investments which intrinsically pay close attention to ethical, environmental, social and governance issues.

Interest in responsible investment is clearly growing across the board – from the industry, policy-makers and regulators, investors and society at large.

Tackling it is a challenge which the Investment Association (IA) has already set about with some gusto. Back in November, the IA launched the first

I FAmagazine.com

ESG ROU N D TABLE

ever industry-agreed Responsible Investment Framework and supplementary definitions which aim to bring clarity and consistency to the way these products are described and to make it easier for investors to understand the opportunities it presents.

Ben Constable-Maxwell is Head of Sustainable and Impact investing at M&G Investments and is part of the M&G team integrating ESG into the overall fund management process as well as managing specific ESG focused funds.

His view is that, from an investment perspective, ESG has shifted from something that was primarily around aligning people's values to something which focuses on those ESG factors that are material to the value of funds. As he summed up, “It has moved from values to value.” However, he was keen to stress that what motivates investors from a personal perspective is still an important driver and that the two factors shouldn’t be disassociated.

Julian Barnard, a one-man band IFA from South London, put a slightly different slant on it, seeing his role as interpreting what the client feels is ESG, and finding the solution that fits. Ethical means different things to different people, “...so it’s my job to delve into what they believe they want, and then try and match that up with funds which are out there. I need to find out whether what my client means

by ESG matches up with what the fund manager believes.”

Adrian Mackenzie, a financial planner and director of Whiting & Partners, took a similar view.

“You have to take into account how strongly they feel, whether clients want to be prescriptive about what they invest in or just want to feel like they’re doing some good.

We find there’s more of that nowadays, they don’t want to limit their investments but want to know they’re making a positive contribution.”

The panel were united in recognising the need to “look under the bonnet” of funds. It’s all very well to tuck “ESG” away somewhere in the marketing blurb, but as Michael Daniels, director at Kingswood Consultants said, “What investors are looking for is honesty, integrity and ‘it does what it says on the tin’. You don’t want to expect vanilla and get raspberry ripple, it needs to be clear what the fund is providing.”

Julia Dreblow referred to Fund EcoMarket, a free-to-use database that she runs which has about 100 different criteria with regard to ESG, observing “There’s nothing more dangerous for an advisor than finding they put someone into a fund that doesn’t do what it says on the tin.”

Transparency is crucial, according to Ben ConstableMaxwell. “The development of ESG has been a necessary and really great development, but it’s come with some challenges. One of the challenges is that it’s a bit of a hot topic and I think there's potential for greenwashing, with the marketing spiel occasionally overclaiming what goes on in reality. So, I think our industry has a responsibility to get

I FAmagazine.com

Februar y 2020

this right. Transparency is the best medicine, so we need to be clear what’s in our fund, what it’s intending to do.

It’s good to have a fund strategy that pushes for improvements; pushing for change is a valid approach, you just need to be transparent. With impact funds transparency is one of the core principles. We must be whiter than white as we are mindful of the risks of being accused to greenwash if we don't do it properly....

Open dialogue with customers is important to understand what they want from us and ensure we live up to their expectations.”

Michael Daniels agreed, quoting the example of an environmental fund fronted by a celebrity scientist which, it later transpired, had been linked to the killing of bats.

Wayne Bishop, CEO of King & Shaxson Ethical Investing, gives advisors questionnaires to take a human belief system to something that’s tangible and usable. “When you talk to people about ethics and their ESG beliefs and the impact they want to have, it does vary. Having a process, a questionnaire, or talking it through will give you an idea of how to take it forward.”

“We have a policy that 3 people look at a fund. I like to be cold and unemotional when I look at something; my colleagues will tell me why the client believes in it. You get different people looking at it differently. One of the hardest things for an advisor is that you have to engage and have an honest conversation, we then have to assess that.

“I’ve learnt over the years, to only look at what they do, not what they say, and I look straight to the holdings. We also constantly monitor. With Shell, they took over BG which was quite a clean energy company but when Shell took over they were at the other end of the spectrum and we found most funds disposed of Shell very quickly. Fossil fuels has been one of the biggest changes in the last 10 years. 90% of people don’t want to go anywhere near fossil fuels, it’s been a real shift in behaviour. One of the hardest things is maintaining the ethical dialogue as there’s a sense of fashion and fluidity in it.”

Harry Merrison, Investment Manager at Kingswood Investment noted that with regard to oil and tobacco, “Ethical indices have outperformed the main markets. I know you’re getting a big yield but at what cost? Arguably ethical investment can be considered less risky – why wouldn’t you want to invest in a company that’s good for the environment, society and well governed? They’re better custodians for investor capital longer term.”

This steered the discussion to ESG and the risk implications, which we report in the next article.

5

Februar y 2020

ESG ROU N D TABLE

CONSIDERING RISK AND ESG When IFA Magazine hosted an ESG roundtable back in the autumn, the discussion turned inevitably to the risk implications of ESG investment.

W

hen IFA Magazine hosted an ESG roundtable back in the autumn, the discussion turned inevitably to the risk implications of ESG investment.

When you ask clients if they’re interested in ethical investments, they want to know the trade off, either added risk or reduced performance. It’s a difficult conversation to have with them and get them to understand if they’re taking on extra risk.

Julian Barnard, Principal at Barnard Lee Associates, noted that it’s something Mark Carney, Governor of the Bank of England has been talking about.

“From a risk profile, if companies haven’t embraced some sort of positivity towards it, they’ll have to in the future.

From my perceptive, I’d always put impact investing as riskier than ESG, that’s because you’re screening out a whole lot more stuff, you’re probably going into smaller companies and into a bigger risk dynamic.

6

Belinda Thomas, partner at Triple Point, commented that Triple Point approach impact investing through their EIS product, as such “this entails investing in smaller companies to be eligible for the associated tax breaks.”

“Of course, it’s a different risk profile than investing in the equity of a FTSE 100 stock, but as advisors you have the ability to step outside only investing in large cap equities and look at other ways of fulfilling the investment needs of your clients, such as using EIS for the private equity part of a portfolio.

“When we are targeting smaller businesses, as part of our Impact EIS Service, we target both financial reward and impact. The higher return the more impact created; if they don’t make a return then they won’t have a good level of impact.”

Julia Dreblow, Founder of SRI Services, also focused on impact. “A lot of impact funds do invest in smaller companies and sometimes they will do better than other

I FAmagazine.com

ESG ROU N D TABLE

funds, sometimes they may do worse. What matters most is what the client wants. If they are happy with mid-sized companies, for example, that’s fine – but you need to keep the bigger picture in mind. Rules and regulations are changing particularly in relation to climate change. Investors have the choice of being ahead of the curve or behind it, but keep in mind that all other factors being equal those ahead of it should prosper as they are better equipped to deal with growing challenges and emerging opportunities.”

Ben Constable-Maxwell, Head of Sustainable & Impact Investing at M&G, noted that “ESG focuses on the material environmental, social and governance risks and on how individual companies are managing those risks and related opportunities. ESG investing can improve the risk profile of your investment; with a long-term mindset you want to know how companies that you invest in are managing those risks. We think that a company with high ESG characteristics can have lower volatility and produce higher returns than the overall market. We think ESG investing is a sensible way of thinking about risks.

It's not about what you're excluding, it's about investing in quality companies. Impact investing is different. With impact, you're investing in and how their business helps address climate change or improve societal outcomes. I think these companies, when selected carefully, are not necessarily higher risk and are really exciting to invest for the long term. ” Julian Barnard added a note of caution; “How you define risk isn’t the way the FCA does. If I’ve got a medium risk client and I put them in there, I’m immediately at risk myself. Secondly, where the risk is amplified, say you want to go into a managed fund, there are plenty of ethical funds as good as its counterpart. You get a much smaller pool and putting together a portfolio, you start to find it hard to be able to find ethical funds in those spaces and it makes it more difficult to put together a portfolio that’s completely ethical. That’s where the risk is amplified.”

I FAmagazine.com

Februar y 2020

“ESG investing doesn’t exclude the majority of the market, it just focuses on better performing businesses and reduces the long-term volatility risk”, was Constable-Maxwell’s view.

“Across ESG there’s a famous example of an auto manufacturer that had flawed governance standards, with an all-powerful board with very ambitious goals. It was because of governance deficiencies that Dieselgate materialised with huge negative financial outcomes. There are examples of companies that are not managing their cyber secutrity risk and the ownership of data properly and are being fined millions on those companies.”

On the question of risk, Michael Daniels, Director at Kingswood Consultants, suggested that political risk is often the most significant factor.

Wayne Bishop, CEO of King & Shaxson Ethical Investing, pointed out that 30 or 40 years ago, no one thought the tobacco companies would be sued the way they were.

“There are lawsuits going out against oil companies, drug companies who used opiates and I think it will persist.

The FCA are saying you have to take climate change risk into consideration, and you can’t ignore it anymore. Risk to me is the risk of losing money. That can happen after bad management, having the wrong product and it also comes from not reading which way the wind is blowing. In environmental areas, we know which way it is blowing. We have no fossil fuel exposure, we’ve replaced it with wind and solar. Although they have their own risks, George Osborne changed the risk profile, but we know which way the wind is blowing, quite literally. The risks are getting higher and higher for oil and coal, and this trend will keep growing into the future. There are lots of reasons to see risks building up. I have respect for the regulators but they’re very reactionary, whereas money isn’t reactionary, and your client’s wealth isn’t, so there needs to be more focus on what the future risks will be.”

The discussion then moved to ESG in practice, which is covered in the next article.

7

Februar y 2020

ESG ROU N D TABLE

ESG IN PRACTICE – SELECTION AND ASSESSMENT

A

t a lively IFA Magazine roundtable session covering all things ESG, Adrian Mackenzie, Chartered Financial Planner and Director at Whiting & Partners, asked “On the subject of risk, a way we would reduce risk is looking at different asset classes. There are more choices in equities, but if I want to introduce other asset classes like property and fixed income, there is a lot less choice. It’s a way I can reduce the overall risk, so how do I go about that?”

Ben Constable-Maxwell, Head of Sustainable & Impact Investing at M&G concurred. “I do think the availability of products is definitely limited outside of equity and M&G is working on that. We recognise there are fixed income investors who want a good ESG fund in investment grade or high yield bonds and our industry needs to deliver that supply as well as integrating ESG into all our funds.”

The discussion moved along to property and social housing; Belinda Thomas of Triple Point noted that “Property is one of the things Triple Point has with

8

social housing providing accommodation for vulnerable members of society who need help from the state through the Triple Point Social Housing Reit (‘SOHO’). It’s an investment trust and is a property fund you can look at.”

Infrastructure and alternative energy investments were also mentioned, but the discussion shifted somewhat when the chair. asked Ketan Patel, Chartered Financial Planner at Prerak Financial Services, what his clients were saying to him.

“I’ve been asking the ESG question very briefly, mainly due to the time required to explain the intricacies of the investment. Most clients do not understand the full nature of the investment and leave it to me to decide. On one occasion, a couple started arguing over who they should sell their business to and this showed me that clients do have strong opinions. I believe ESG is probably lower risk because the companies you are investing in are doing things the right way. Having seen companies get into trouble because of debt or accounting scandals, I think this is the right way of investing. However, my hands are tied when it

I FAmagazine.com

ESG ROU N D TABLE

Februar y 2020

comes to putting client’s money into these investments as I have to follow the rules when it comes to assessing risk.”

Michael Daniels, Director at Kingswood Consultants, observed, “In my experience, most IFAs are very sceptical, we’ve had too many false dawns in our industry and very often we have on one hand the client’s needs and their objectives and we have to balance that against all the risk and we then have to deal with the regulator. It’s not necessarily a compatible existence. When I hear about social housing funds, a knowledge about the range of products available is a foggy area as these companies don’t promote themselves to the IFA market, so we have to go looking for it. This means time away from our office and clients. As a firm, we never have a problem giving a balanced ESG portfolio. The important thing is we need to have an improved knowledge of how the market is changing and emerging, which takes time.

Julian Barnard, Principal at Barnard Lee Associates, added: “There are the asset classes out there where you can put together a perfectly reasonable portfolio for a client and their risk dynamic. Our job is to communicate to clients what’s involved, what the risks are, and yes you can find them, but you have to brutally narrow down the field in terms of the fund range available. Once you narrow down that range, you automatically increase the risk and you can’t get around that. The investments you make might not be any riskier than a non-ESG counterpart, but if you’re the only one in the field then I’ve increased the risk as you may be rubbish at your job.”

Julia Dreblow of SRI Services added that “in some areas there is limited fund choice but this challenge is gradually evaporating with a combination of new launches and existing funds upping their game.”

The question arose that with impact funds, what’s the due diligence to mitigate risk and how do you communicate that to advisors?

Harry Merrison, Investment Manager at Kingswood sees it as an opportunity; “As part of our due diligence, we talk

I FAmagazine.com

about ethical preferences – it’s a massive opportunity.

I’m interested in thematics. Clients will talk about clean energy or gender equality, the universe is quite broad for those.

We add ethical overlay into private client institutional funds as par for the course. It’s a great opportunity to offer clients what they want – there are so many funds out there.”

Belinda Thomas, Partner at Triple Point, explained, “The due diligence we go through is the same for any private equity investment - whether they have a good management team, whether the business is scalable and sustainable. We also look at our impact measurement to ensure the funds going into the company will be additive. Within our Impact EIS Service, we’ll only invest in companies whose products are either in healthcare, inequality, environmental issues or children and young people. We report back to investors on a 6-monthly basis; part of that report will have the financial return and as we measure the level of impact we also give a monetary value, so you can compare the impact achieved. We measure impact by looking at KPIs that we agree with the company we’re investing in right at the beginning, ensuring they are both measurable and the company can provide the information easily.”

Ben Constable-Maxwell added, “With impact, one of the factors that you need to identify during the due diligence is intent or intentionality, that’s identifying companies who are walking the walk. We spend a lot of time focusing on intention and if it’s genuinely carried out. If we say we're doing this and the fund is delivering impact, it needs to be evidenced. It cannot be just nice marketing materials. We must demonstrate that we are doing it right and seriously across our whole investment process.”

9

Februar y 2020

ESG ROU N D TABLE

Belinda Thomas agreed: “We’re one of the largest lessors for the NHS and were one of the first people to bring leasing as an asset class to investors. Our intention of doing that was bringing a really good riskadjusted return to retail investors, it wasn’t to necessarily find something ethical or ESG focused, it was just a good business opportunity to get a good solid return for investors that happens to create broader value for society.”

IFA Magazine publisher Alex Sullivan asked if there was a percentage of clients who want more than just returns on their funds.

Julian Barnard replied, “Quite a few but if you looked at my client base, because of the way I work, and I work at home, I live in Clapham so you get a more left-wing bias in my client box, rather than the people who would go with a suit and tie. Ethical criteria are probably much higher on the list. There aren’t too many people, about 5% will say specifically, but I guess with ethical being a criterion, it’s about a 60% response. The only person I’ve ever asked if they want ethical and didn’t was a vicar’s wife.”

Michael Daniels had a general observation: “The main role of the IFA is to manage client expectation. It’s been well researched by Schroders, most clients want 10.7% return per annum, preferably without risk. I was the first IFA in the UK to introduce the question about if they were concerned about how their money was invested. I’ve only had one client who said they didn’t care how they make money. There was a company importing cigarettes from Russia known as ‘death cigarettes’ so I said we’d invest in them, he said he wouldn’t want to invest in them, so that

10

showed he did have a concern, you can then use that to develop a better relationship with the client.”

Adrian Mackenzie had another question: “What indices should I use to measure ESG / sustainable / ethical investments?”

The M&G view was that most funds in the ESG space will either have a normal standard benchmark, or increasingly use ESG versions of those benchmarks. “There are different views on the right approach to take. For our positive impact fund, we use MSCI All Countries World.

We haven't used an ESG benchmark but we could have done. I think that when you are in the impact world, funds tend to be very different from the benchmark as they focus exclusively on those companies that do good for society or the environment.”

Wayne Bishop, CEO at King & Shaxson Ethical Investing summed up: “I would resonate what’s been said. Fashions come and go, I’ve been doing this since 2002 when you were the weirdo in the corner and people thought it wasn’t serious. People underestimate that this is underwritten by real consumer desire and generational changes. There are a lot of older people driving this as well. It’s also politically desirable and it’s hard for politicians to go against ESG requirements. You can see that there’s a political driver as well as a personal driver, but above that there’s sound business sense. A lot of people providing ESG, they didn’t just wake up and think they could provide ESG, there are also companies doing this as it makes good business sense.

It’s not just one thing, it’s all three operating in the same direction so it’s not just a trend but the way things are going to be. When we talk about transition, it’s happening on every front, and in 10 years’ time, the conversation will be quite different. This will be mainstream.”

I FAmagazine.com

The complete estate planning solution Establishing the adviser at the heart of the client relationship, today and in the future A new service that seamlessly combines the key elements of specialist investment management with external expert estate planning professionals, to support advisers in providing the most tax efficient, intergenerational wealth strategy for their clients.

If you are interested in growing your estate planning business, and offering a more complete service to your clients please contact Matthew Steiner or one of the adviser team at Stellar, to see how we can work together.

Matthew Steiner - Director 020 3326 0682 | 07786 930 360 matthew.steiner@stellar-am.com Switchboard - 020 3907 6985 stellar-am.com

Multiple elements. One estate planning service.

Stellar Asset Management Limited Kendal House, 1 Conduit Street, London, W1S 2XA +44 (0)20 3195 3500 | enquiries@stellar-am.com | www.stellar-am.com Authorised and regulated by the Financial Conduct Authority (FCA) under No. 474710.

NOV 19 / 403604