1875 - Summer 2020 - Intermediaries

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A NEW PUBLICATION FROM REDMAYNE BENTLEY

SUMMER 2020

GREENWASHING: FAKE NEWS, OIL AND THE ENVIRONMENT Can you trust a company’s green credentials?

INVESTING FOR GOOD HOW CAN DEBT BE SOCIAL? How Social Bonds can help make our world a better place

How millennials are investing for change

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CONTENTS INTERMEDIARY VERSION

INTRODUCTION 2 Your Legacy

ETHICAL INVESTING

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ESG - A Brief Introduction

INSIGHT 6 Investing For Good

GREENWASHING: FAKE NEWS, OIL AND THE ENVIRONMENT

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Can you trust a company’s green credentials?

AN ABC OF ESG

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HOW CAN DEBT BE SOCIAL?

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A NEW NORMAL?

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Will COVID-19 have a lasting effect on ESG policies?

ESG CHECKLIST

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Past performance and forecasts are not reliable indicators of future results and performance. There is an extra risk of losing money when shares are bought in some smaller companies. Redmayne Bentley has taken steps to ensure the accuracy of the information provided.

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“Investors... want to see their mon in the right way, by experts that grow an idea for good into someth and financially viabl

ney put to work t know how to hing sustainable le.”

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YOUR LEGACY JAMES ROWBURY | INVESTMENT RESEARCH COORDINATOR

In a time of rapid change, we, as investors, have become ever more mindful of the impact our capital allocation has on the world. We want you, as clients, to be comfortable with the choices we make and be assured that we will adhere to your preferences, ethics and environmental concerns. This means keeping a keen eye on the trends that shape our theses and the ‘red flags’ we look for in investments that seem too good to be true. Sometimes this might be reactive; governance issues in companies are not always easy to spot.

Take the German payment processing firm, Wirecard, which was recently accused of accounting fraud and has since had a number of its top executives arrested over the matter. The company was a darling of the European stock markets; a must-have, high-growth company. The only evidence investors were given was the auditor’s report, after it was publicly available, which led to many unlucky supporters losing a significant amount of their investment.

Rather than being caught short, many companies are looking to adapt to the new world and demonstrate the changes they are making for the good.

But are some just pulling the wool over our eyes? (See Greenwashing: Fake News, Oil and the environment).

Oil companies have been in the firing line ever since the Deepwater Horizon disaster of 2010, when one of BP’s US Gulf Coast rigs exploded into the sea, damaging around 1,300 square miles of the ocean’s ecosystem. Today, they face new and more slow burning issues; investor and consumer sentiment toward the use of fossil fuels is turning negative and the oil majors have reacted with plans to reduce and neutralise their footprint on the world. Can we believe them?

Investing for impact has become a hot topic of late. Investors don’t just want to avoid the pitfalls of poor environmental

and sustainability controls; they want to see their money put to work in the right way, by experts that know how to grow an idea for good into something sustainable and financially viable.

The rise of millennial wealth and the influence of social media have shone a spotlight on the issues that face our planet, not just our country (see Investing for Good: Millennial wealth and its impact on the world). Investors are now turning to ventures that will improve their world and that of future generations.

The bond markets don’t seem the most obvious place to seek investments that carry ethical credentials, though we explore their potential (See Social Bonds) to provide project-specific capital. The growth in this market allows investors to be picky; perhaps funding a new University research centre, or a community hub. With sound financial backing and a certainty of cash flows over the life of the bond, it’s no wonder the market is expanding year on year.

The world of ESG is far reaching and not straightforward. For us, it is about understanding each of our clients’ individual views and ethics around a variety of subject matters. Only then can we ensure your portfolio is not just to meet your financial objectives, but is your legacy.

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ETHICAL INVESTING ESG – A BRIEF INTRODUCTION At a time of global warming, rapid deforestation and extreme weather events, global industries are experiencing widespread social and economic change. Businesses are adopting greener practices, they are providing better and safer working environments, and the public is demanding greater transparency and diversity.

“Research indicates that as more companies seek to become more environmentally, socially and corporately responsible, investment in these players is increasing.”

These factors can all increase a company’s attractiveness to investors while also influencing its approach to Environmental, Social and Governance (ESG). Defined by MSCI Research as “the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process,” ESG is somewhat of a buzzword at present.

Under the ESG umbrella, sustainable, ethical and corporate governance are all factors that can affect a company’s image and reputation. For example, a report published by The Bank of America states that it has taken a lax approach to diversity in the past, and this may affect it going forward. Similarly, environmental aspects can include a business’ response to climate change and resource consumption.

Meanwhile, social factors can range from working conditions and health and safety, to employee diversity and the business’ impact on its local community, while governance factors may include executive pay, political affiliations and board diversity. Examples of ESG factors can be seen in fig.1.

Each of these factors can significantly influence an investor’s decision-making process. As companies begin to embrace environmental, social and corporate

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GOVERNANCE

B

change they may become more attractive in the eyes of the investor.

POLITICAL AFFILIATIO £

For example, investments relating to Industry 4.0, the fourth industrial CORPORAT revolution which is defined PAY

by Forbes as the digitisation of the manufacturing process through autonomous systems, data and machine learning, can bring a variety of environmental benefits. Through the use of automation, connected devices and machine learning, manufacturing lines use fewer resources and produce less waste. Employees are also able to learn new skills relating to the uptake of connected technology, developing them professionally.

For example, one of the best-known companies using Industry 4.0 to its advantage to improve its ESG is Tesla.

The company’s stocks rocketed at the end of June/beginning of July to reach an all-time high as CEO Elon Musk announced to his staff that the company was on the verge of breaking even and qualifying for the S&P 500, despite the impact of COVID-19. Tesla, with its environmentally-friendly technology and manufacturing processes, may be an example of a company working to improve its environmentally responsible credentials.

Research indicates that as more companies seek to become more environmentally, socially and corporately responsible, investment in these players is increasing. According to a 2018 report published by Morgan Stanley titled “Sustainable Signals”, 84% of investors

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BOARD DIVERSITY

WATER CONSUMPTION

ENVIRONMENTAL CLIMATE CHANGE

L ONS

ELEMENTS OF ESG

TE

POLLUTION

governance or environmental problems.

However, recent research suggests quite the opposite.

As previously alluded to, it may be in the best £ economic interests of a company to improve their ESG credentials, EMPLOYEE HEALTH such as by incorporating BENEFITS & SAFETY sustainable considerations in their decision-making INEQUALITY process. For example, Coca-Cola has worked in recent years to implement a number of changes Fig. 1 Elements of ESG to meet sustainability targets and drive its business forward.

According to Coca-Cola’s 2019 Sustainability Report, environmental considerations are at least “actively including water stewardship considering” socially and packaging, as well as social responsible investments. and governance issues such as Much of this increased human and workplace rights, were uptake could be attributed of high concern to stakeholders and had to the benefits of ESG investing, including helping to grow ethically-sound a big current or potential impact to the Coca-Cola system. Going forward, the businesses. In fact, assets relating to company will ensure that 100% of its sustainable investments in a combined packaging is recyclable by the year 2025 six global regions rose from a value of in an additional ESG boost. Coca-Cola is US$13.3tn in 2012 to US$30.7tn in 2018 also aiming to improve its social aspect of according to a 2020 report published by ESG by setting a goal for 50% of its sales Visual Capitalist titled “Visualizing the to come from low or zero calorie drinks Global Rise of Sustainable Investing”. With by 2025, the company states. more businesses adopting more ethical practices, this figure could continue to Benefits for the individual investor, rise. meanwhile, can include the fact that they know they are making a difference. If, As recently as 2017, a Schroders survey as an investor, you can help a company found that ESG investing can harm that places environmental, social and potential returns if companies have poor

SOCIAL

corporate responsibility high on its agenda and make a profit while doing so, everybody benefits. This aligns with the buying habits of millennials.

A 2015 report published by Nielsen, titled “Consumer-goods’ Brands that Demonstrate Commitment to Sustainability Outperform those that don’t” found that 73% of millennials are willing to pay more for sustainable products. The report suggested that consumer goods brands that demonstrate a commitment to sustainability perform better than those that don’t.

While there are some clear positives to ESG investing, there are also some drawbacks which may dissuade some.

For example, by opting to invest in environmentally, socially and ethically responsible companies, some wellperforming companies may be kept off the table. Meanwhile, there is no set criteria to state which companies constitute ESG investments. The phrase is open to interpretation and while some companies may be socially responsible, they may not be ethical in an environmental sense.

Nonetheless, as global industries seek to become more ethical, the appetite from investors to back these companies increases. With more and more environmental, social and corporate business regulations being introduced, ESG investing is one for the future.

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INSIGHT INVESTING FOR GOOD: MILLENNIAL WEALTH AND ITS IMPACT ON THE WORLD JAMES ROWBURY | INVESTMENT RESEARCH COORDINATOR

Now, more than ever, humanity can witness at close hand the environmental and social impact of its actions. The rise of the internet began the process, allowing traditional media to be bypassed to highlight stories that may not previously have been told. Social media has further democratised this process, giving ordinary people, sometimes called ‘citizen journalists’, a lens through which the world can both be seen and broadcast.

Localism has been made universal and globalism brought home. Our ‘bubbles’ are blown up to be the size of the planet and “I didn’t know” rings hollow as an excuse.

The precise originator of the phrase “with great power, comes great responsibility”, is debatable, but the truth of it hasn’t faded since it was first voiced in the 19th century – in fact, it resonates anew with each generation’s desire to change the world for the better. The question to be answered is: if we have the power to know how our choices affect others, then what are our responsibilities?

Activism plays a key role in both highlighting global injustices and inequalities and driving political change to remedy them. But it is no new trend; it has been at the foundation of our fights for democracy for centuries, from the suffrage movement in the late 19th century to the early climate change movements in the 1990’s. In today’s world, however, the ever-increasing influence of social media has enabled

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previously disparate voices to band together, to create a powerful single call for change. Most notably, last year’s Extinction Rebellion protests paved the way for a global movement of activists calling for an end to greenhouse gas emissions and a halt to biodiversity loss. The movement demanded change at governmental level, to stop what it believes would be an ecological collapse that would end the world as we know it.

Perhaps though, governments cannot bear the burden alone. Perhaps the responsibility also lies with those that are investing in potentially planet-destroying progress, and those that consume it.

My colleagues on other pages will talk of the ways in which ESG investing has changed our investment analysis; it is now the key to better investment

outcomes and, ultimately, financial returns. However, I would ask whether the financial aspect is always the driving force behind investors’ decisions. Do people really care whether their money is being used to drive a better world? Most importantly, can they really afford to care?

The innate human purpose is to selfpreserve and reproduce; to look after ourselves and our own. Though, as the wealth divide has widened globally, we have witnessed a great shift in society’s desire to distribute our riches to causes that are otherwise underfunded; in the UK alone, we donate an average of £44 per month, with 60% of the population giving a proportion of their wages to charities every year. Often

UK INTERGENERATIONAL ASSET TRANSFER By 2027, annual assets transferred from one generation to the next will be almost double today’s amount

£69bn 2018

£115bn 2027

Fig. 1

Source: Kings Court Trust, Russell Investments, Redmayne Bentley

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though, it is hard to track the impact these donations have, with little tangible evidence of their use. Furthermore, this is an entire transfer of capital, and charitable givers are doing just that; giving their money away.

Investment markets provide an alternative way for people to put their money to good work; impact investing. Although a relatively small sector, we are seeing its growth emerge as more than the David of the Goliath markets, and instead, into a credible source of capital funding. The question remains, however, as to how impact investing will gain the traction it needs to make a meaningful difference and generate returns. In come the Millennials, the social media generation and the ones with all the power - will they use it?

We are undergoing a generational shift in wealth across the globe, known as ‘The Great Wealth Transfer’. Decades of buoyant asset prices have given way to a generation of investors who are now beginning to pass this wealth down to their offspring, the Millennials.

According to research, by 2027 the amount of wealth being passed between generations will almost double in the UK (see Fig. 1), while it is also estimated that a total of £5.5tn is due to be passed down in the next 30 years.

This is not just hearsay or activist propaganda; research shows that Millennials have a desire to create meaningful change, and they have been making the decisions to back this up. They are more interested, more optimistic and more driven than previous generations (See Fig. 2) and they believe their actions can change the world for the better. Perhaps the urgency depicted in movements such as Extinction Rebellion has played a vital role in this, or perhaps investors are looking beyond all the talk and asking themselves; how can I actually help?

The great benefit of investing for impact is explicit in its name; it is not merely a donation, but a tangible use of capital with the perks of capital growth and distribution of returns through dividends.

Do impact investments actually provide returns? The spectrum is wide, and the

MILLENNIALS IMPACT DATA Millennials are more optimistic and interested in the impact of their investment decisions

100% General Population 80%

Millennials

70%

85% 71%

60% 49% 40% 20% 0% INTERESTED IN PURSUING INVESTMENTS WITH A SOCIAL IMPACT Fig. 2

BELIEVE THEIR INVESTMENT CAN HAVE AN IMPACT ON CLIMATE CHANGE

Source: Morgan Stanley, Redmayne Bentley

lines are a little blurred, but the principles we apply to any thesis still stand; we look for the fundamental drivers of growth and whether the investment will be put to good use. Ultimately, this is not charity, and frankly, what is the purpose of an investment if it were to lose value? That’s not going to drive growth for your own capital, or provide the return needed for the invested project to grow and develop.

The spectrum of investing for impact is wide, but if adopted in the right way can let you have your cake and eat it.

“ESG investing has changed our investment analysis; it is now the key to better investment outcomes and, ultimately, financial returns.”

HOW DO I INVEST FOR GOOD, BUT ALSO MAKE A RETURN? Investing in the right trends has been a key element to impact investing, but the fundamentals need to stack up.

Philanthropy is all well and good to a point, but you need to see your money work, both for yourself and so it has an impact. Government policies and

subsidisation around climate legislation have provided a favourable backdrop for the renewable energy market. We are all too aware the impact of burning fossil fuels has on our health and the environment, making investment in this area an obvious choice. With the help of both government and investors alike, renewables now account for about 36% of the UK energy mix, which has risen from well under 10% in the mid-noughties, making cleaner-energy projects a viable investment with genuine returns.

We cannot predict future trends in global consumption, but we can look to emerging opportunities and threats to society for a good indicator. Finite resources, such as energy, water and timber remain key worries for policy makers. With this in mind, we remain cognisant of the investment opportunities available in these areas and will watch closely for innovative solutions to these problems; be it electric vehicles, energy storage, or water conservation. We, as custodians of wealth, need to be at the forefront of capital deployment, when these problems need the money to help solve them, while ensuring our clients remain invested in the most exciting changes to our world as we know it.

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GREENWASHING: FAKE NEWS, OIL AND THE ENVIRONMENT SAUL FULDA | INVESTMENT ANALYST

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We hear the phrase ‘fake news’ batted around regularly these days. The infamous quote, launched into our vocabularies by President Trump, is often used in the political arena, but it is only a matter of time before we see the phrase making headlines in the financial world.

Two events spring to mind which depict companies spewing fake news about their ESG credentials.

Earlier this month, Octopus Energy, which promises to offer energy that is good for the planet, was ditched by Friends of the Earth, after the energy company received investment from an Australian coal and fracking group.

the fund management industry. Since 2010, the number of UK ethical funds has almost doubled, with investment houses desperate to outshine one another by slapping a big ethical badge on the front cover. Stretching the net wider, US$45.6bn flowed into global sustainable funds in the first three months of 2020, which sits alongside the 1,000+ MSCI ESG indices.

Thus, the demand is certainly there for ESG investing, but investors must differentiate between the companies which talkthe-talk and those which walk-the-walk.

While Mr Looney’s ambitions may seem ludicrous, some oil majors comprehend the direction of travel within the industry and fit firmly into the latter category. Take Equinor, the Norwegian oil giant, which has invested huge sums into Similarly, following George Floyd’s tragic death, company offshore wind farms. While renewables may only account after company tried to show their support for Black Lives for c.10% of Equinor’s Net Asset Value, the progress made Matter on social media; the black square became a symbol has given the company a first-mover advantage and espousing the cause. This gesture, while provides the goods at the back of the shop to virtuous, inadvertently put pressure on the ESG’s shop window; they are walkingcompanies to speak out, with those the-walk. It goes without saying that who were slow to react receiving “The transition to an value creation from hydrocarbons will harsh criticism. But how many inevitably remain high, but Equinor of these companies truly stand environmentally-friendly will produce less oil in a low carbon up for truth, justice and racial future will not happen future and shift its business equality? overnight, and outlandish towards a more green-focused mandate.

Without getting boggedclaims from the leaders down by the racial disparities of oil, gas and mining The transition to an plaguing the US, both stories environmentally-friendly future lead to the same conclusion; companies are arguably will not happen overnight, and namely, it is easy for companies worth less than the paper outlandish claims from the leaders to put on a show when it of oil, gas and mining companies are comes to their integrity, positive they were written on.” arguably worth less than the paper they environmental impact and racial were written on. The investment world and gender equality. This poses a needs actions rather than words. Initially, serious question; if the largest group to it was acceptable to place an ESG badge on the invest in the UK solar energy sector is also name of a fund; it was unique and offered investors forging partnerships with traditional, carbonexposure to something different. Today, however, the sheer heavy businesses, and if companies are fabricating the truth number of ESG funds, and the fake news surrounding the in showing their support for racial equality, how are we able to sector, has fizzled the lines separating ESG and non-ESG trust companies ‘green-branding’? funds.

This phenomenon is making ESG investing increasingly It is critical to look deeper than the top-ten holdings of a fund/ difficult. Cynical marketing ploys are throwing an ESG investment trust, and critically analyse the screening process tag on virtually anything to jump on the bandwagon. Even used to ensure the underlying holdings match the green the oil majors are getting involved. BP’s Chief Executive, branding. Likewise, when choosing individual equities, we Bernard Looney, has pledged to eliminate the carbon footprint look past the fake news and warped marketing on social media from its operations but failed to outline any intricacies; to hand-pick environmentally-friendly stocks as and when Glencore’s Chief Executive, Ivan Glasenberg, labelled the instructed by a client. target as “wishy-washy”. With BP’s cash-flows knotted to the production of fossil fuels, further details would have been most That Equinor, one of Europe’s oil majors, has invested billions welcome. into green energy projects highlights the need to look past the headlines; BP may be the shop window, but Equinor is the This, alongside scandals such as the Volkswagen diesel goods at the back of the shop. emission fraud, helps to illustrate the opaque nature of a company’s ESG credentials. The same issue can be seen in

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ACTIVE OWNERSHIP Investors take a more active role in their share ownership, including voting, attending AGMs and engaging company management on ESG related issues.

BEST-IN-CLASS An approach to investing that focuses on investments in companies that have historically performed better than their peers on ESG. This typically involves positive or negative screening, or portfolio tilting, to include or exclude companies from portfolios.

THE A B ES

CARBON FOOTPRINT A portfolio’s carbon footprint is the combined carbon emissions of each company held, proportional to the amount of stock held in the portfolio. It can be a useful quantitative tool that can inform the creation and ongoing management of a portfolio which seeks to support broader climate change strategy.

CLEAN TECHNOLOGY Products, services and processes that use fewer natural resources and cut or eliminate emissions and waste.

CORPORATE RESPONSIBILITY This is the concept that a company has a responsibility to operate its business in a way that does not harm the environment or society as a whole.

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DIVESTMENT The act of selling or otherwise disposing of shares or other assets, either in full or in part, to remove holdings from a portfolio that do not fit with an ethical mandate.

DECARBONIZATION Decarbonization is the process of reducing the carbon intensity of worldwide energy use. Investment portfolios can be decarbonized.

ESG INTEGRATION An investment approach that takes into consideration a range of sustainability and ESG-related risks and opportunities.

GREENWASHING Overselling or dishonestly communicating the environmental benefits of a product, service or organisation in order to make a company seem more environmentally-friendly than it really is.

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THE QUARTERLY

B C OF SG

GREEN INVESTING An investment philosophy that considers and makes decisions based upon the environmental impact of the investment.

IMPACT INVESTING An investment strategy where investors choose to provide capital to companies who are specifically focused on generating returns while providing societal or environmental benefits.

NEGATIVE SCREENING An approach that narrows the investment universe, for ethical reasons or to meet specific investment criteria. It works by excluding companies in certain industries, such as alcohol, tobacco, armaments or producers of fossil fuels.

POSITIVE SCREENING The opposite to negative screening, this works by specifying ESG criteria to identify investment opportunities, often using a best-in-class approach relative to peers.

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QUALITATIVE ANALYSIS Detailed non-numerical analysis of company policies, practices and potential impacts, this approach is used by investment managers to avoid undesirable companies and identify and invest in companies that meet ESG-related criteria, by feeding into positive screening.

SUSTAINABILITY REPORT Company reports produced to inform stakeholders about policies, programs, and performance regarding ESG issues.

Also known as corporate citizenship reports, or CSR reports.

SIN STOCKS Shares in companies engaged in activities that the investor considers to be morally or ethically unacceptable, such as gambling, pornography, alcohol, tobacco and weapons manufacturing.

THEMATIC INVESTING Investing in companies that can be classified under a particular investment theme such as renewable energy, waste and water management, education or healthcare innovation.

VALUES-BASED INVESTING Investing that prioritises an investor’s ethical objectives and concerns, rather than simply maximising financial returns.

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HOW CAN DEBT BE SOCIAL? ROBERTO FARRINGTON | INVESTMENT RESEARCH

A rather underappreciated area of ESG investments by retail clients is the fixed income market – particularly social bonds. However, a growing appetite in public markets has motivated more institutions to issue their debt to investors – having more than quadrupled last year’s nominal value, the social bond sector is expected to be one of the fastest-growing segments of the fixed income market. S&P Global Ratings wrote in a recent report, A Pandemic-Driven Surge In Social Bond Issuance Shows The Sustainable Debt Market Is Evolving, that, despite an investor focus on protecting portfolios during the economic effects from the COVID-19 outbreak, sustainable finance has been gaining traction. So, what exactly are social bonds and why have they been gaining popularity over recent months while the wider market continues to weaken?

Social bonds are a type of debt instrument that raise funds for social causes, such as environmental change, improving education, or for medical research. The past few months have been a turbulent time for the world given the ever-increasing backlash against fossil fuels, the medical and economic implications of the COVID-19 outbreak, and rising awareness of racial issues, all of which have acted as a beacon for awareness of social projects. This sea change has both pushed supply forces, whether that be in construction of renewable energy plants or new schools in economically-impoverished areas, as well as demand forces, with an increasing investor appetite to fund projects for social good.

Issuers of social bonds vary significantly in size and scope, whether that be the African Development Bank’s recent US$3bn raise to support African countries and companies or Karbon Homes releasing £100m to continue achieving its target of adding 500 homes to its portfolio each year. According to the International Capital Markets Association (ICMA), a not-for-profit organisation that reports on the regulation and market practice of retail bond issuance,

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social bonds are also being used to fund COVID-19related expenses, from supporting struggling SMEs to funding medical research. It states, “The general population is likely to be affected by the pandemic, including by any resultant socioeconomic crisis, and social bonds, while seeking to achieve positive social outcomes for target populations, may also serve to address the needs of the general population.”

Although such products have become more mainstream in recent months, the sector has been slowly gaining traction over a number of years. One of the largest funds in the space, Threadneedle UK Social Bond Fund, has almost doubled its assets under management over the past two years. Simon Bond, the fund’s manager, has invested in various UK-focused social projects across the country, including a partnership with Leeds University which raised £520m for a campus development program.

This included the development of The Edge, which is the on-campus state-of-the-art gym, and the Nexus building, which is the University’s new startup incubator. Such investments help improve the competitiveness of the University, while helping to attract world-class students to the North of England and support local businesses.

Other less well-known investments in the fund include the Co-operative Sustainability Bond, which is the first ICMA-compliant sustainability bond issue by a UK retailer. It will use proceeds for social activities ranging from enhancing its Fairtrade model to investing in more energy-efficient transport for its various operations.

Social bonds will be an area to keep an eye on in the coming years. In a world where uncertainty is rife and investors are searching for yield, such bonds can provide reasonable income while at the same time making the world a better place.

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“There is the distinct possibility that COVID-19 could change the playing field for financial markets for years to come... �

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THE NEW NORMAL? WILL COVID-19 HAVE A LASTING EFFECT ON ESG POLICIES? The coronavirus pandemic has created severe challenges for businesses around the globe, from their initial response to the outbreak of the virus to their ongoing preparations for a possible recession.

While businesses may be anticipating an eventual rebound in demand and speculating on how the postCOVID-19 world will look, questions remain as to whether the COVID19-accelerated environmental, social and governance (ESG) policies, whether considered or already implemented, are here to stay - will they become the ‘new normal’.

Will the continuing easing of the UK’s lockdown provide the economy with the boost that it so desperately needs, or is it just a matter of time before a second lockdown emerges and the economy suffers once again? Will social norms and consumer preferences be forever changed by the pandemic? And what will the post-COVID-19 consumer landscape look like? The range of outcomes is wide and undefined, with the pandemic not only revealing the strengths and weaknesses of how the country is dealing with the crisis, but also highlighting the vulnerabilities and social divisions across society.

Over the past few years the integration of these ESG factors into investment decision-making has seen a notable rise, moving beyond what could have once been considered a trend. DWS Research Institute recently published a paper “How COVID-19 could shape the ESG landscape for years to come”. In the paper, DWS says that the pandemic is actually advancing the strategic case for sustainable investment because people are putting more money into sustainable investments. However, if this rapid acceleration towards the integration of sustainability into business models is directly tied into a response to the virus, could success against COVID-19 eventually slow down or derail progress?

Saul Fulda, Investment Analyst at Redmayne Bentley says: “The idea that ESG investing negatively impacts returns is a key stumbling-block to its take-off. We need to help remove this fallacy.”

Although the pandemic is far from over, many of us are starting to speculate about its long-term political, economic, and social consequences. There is the distinct possibility that COVID-19 could change the playing field for financial markets for years to come, however, it has yet to be established which lessons, if any, will have been learned from the handling of the pandemic.

Ultimately, the economy shrank by 20.4% in April - the largest monthly fall on record. Back in March, when the pandemic had reached Europe and North America, nearly all public markets saw unprecedented losses, however, ESG-related investments saw roughly half the losses of the main indices.

Prime Minister Boris Johnson said the country would “bounce back” from the pandemic, and he has set out plans for a building boom. Chancellor Rishi Sunak will lead an Infrastructure Delivery Taskforce, which aims to help to remove “bottlenecks” faced by major projects.

These measures will look to boost job numbers and improve connectivity for cities, towns and villages.

It might be too soon to analyse the behavioural changes influenced by COVID-19, however, it is likely it will lead to a strengthening in momentum that is propelling the sustainability

movement. The social issues, such as employment conditions, social safety nets and access to health services, may move up the agenda driven by the emphasis on the importance of the “S” in ESG investing. The pandemic has already influenced a huge uptick in demand towards the digital economy as consumers explore how to live their lives with reduced social contact. This looks set to continue into the post-COVID-19 world, with the push towards digital and adaptation of remote working and socialising asking awkward questions of the previous norm.

The pandemic has made crystal clear the link between our actions and the health of the planet. In March, it was widely reported that pollution and greenhouse gas emissions had fallen across continents. As countries attempted to contain the spread of the virus, social and economic restrictions saw reduced emissions and energy usage. The Ministry of Ecology and Environment reported that the proportion of days with “good quality air” was up 11.4% compared to the same time last year in 337 cities across China.

Satellite images across Europe showed that nitrogen dioxide emissions faded away over northern Italy, with a similar story across Spain and the UK. In a post-COVID-19 world, respect for and appreciation of natural assets such as cleaner air, water and healthy food may be pushed higher up the world’s agenda as consumer preference continues to modify corporate output.

The government is now in the spotlight.

The decisions they make have the potential to ensure that the immense public funds now being mobilised are used to accelerate transformation towards cleaner, healthier and more resilient and inclusive outcomes.

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ESG CHECKLIST NICK WILLIAMS | INVESTMENT MANAGER & CO-CHAIR OF REDMAYNE BENTLEY’S ESG COMMITTEE

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ESG – which, as I’m sure you’ll know by now, stands for Environmental, Social and Governance – investing is mot du jour in the financial advice world. It’s also an ever-increasing priority for your clients, too.

We’re in the midst of a shift in investment values.

Millennials care greatly about the impact their purchases and investments have on the world, as do many investors, including around half of Baby Boomers. So, whether we are talking about the inheriting cohort or their testators, they’re likely to be interested in ESG. Here’s what we hope is a helpful list of themes which you might like to include in your various client touchpoints.

BUSTING MYTHS… Investing ethically and making money are no longer mutually exclusive, but many still think they are.

Although it could get broader in certain asset classes, the choice of investment solutions is wide, but in my experience many people still feel it is quite niche. …AND JARGON It is a good idea to invest some time in sifting through the acronyms. ESG is a broad church with plenty of overlap and plenty of chances for the client to get confused!

Know your SRI from your CSR, your Impact from your sustainable investing.

A natural starting point. If you can explain it succinctly, you’ve got more chance of engagement.

ESG, I find, has a lovely way of encompassing all of them to some degree, so you can comfortably shepherd the conversation back to factors of environment, social and governance.

MSCI put it like this:

A&B ESG

WHAT IS ESG?

“ESG investing is the consideration of environmental, social and governance factors alongside financial factors in the decision-making process”.

Put simply, it’s ensuring your investing takes care of the planet and those living on it. But it will help greatly if you emphasise that it sits alongside traditional analysis. This isn’t radical investment strategy, but an extra layer of due diligence.

THE EFFECT IT HAS ON RISK...

ESG’s recent shift into the popular consciousness is due largely to the growing body of reliable evidence that it reduces risk – especially tail risk. Companies which manage ESG issues well are generally better structured and better led, with fewer compliance and governance issues. Polly Peck and Enron-like events happen far less frequently amongst those who score highly in the ESG stakes.

Why not present it as part of a multi-solution? If you don’t already, you could choose an ESG strategy to sit alongside your traditional offering. The client then gets a chance to experience the smoother nature of the performance, but the change is not too dramatic.

NEW RULES We expect new ESG rules from the FCA in 2021. We don’t currently know the exact content but can base it on the EU proposals which preface the new standards and can safely say that ESG will have to be factored into the onboarding process. The client’s ethical preferences will be considered in a far more robust way than is currently the case on average, ultimately being reflected in the advice.

I’d suggest the following checklist as the basis for a review of how your organisation is geared up for ESG: • ESG investment offering

…AND RETURNS

• ESG section for your investment committee meeting

Returns can be higher too, as these companies become more competitive and efficient than their peer group, and enjoy a lower cost of capital, feeding into more sustainable profitability.

• Flyers and sales aids

THE FEEL-GOOD FACTOR The positive financial effects are, of course, in addition to the inherent moral satisfaction that comes from knowing your money is doing its bit to make the world a better place.

• Detailed questions in fact finds, with a direct mapping into an appropriate mix of investments • Prepare ‘soft’ questions for early meetings. Don’t assume that, because the client doesn’t mention it, it’s not important to them • ESG section in client reviews • CPD modules • Seminars with specialist speakers • An in-house glossary of ESG terms to bring you up to speed

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