Jargon

The investment industry is full of jargon and acronyms which often leaves investors confused and slightly apprehensive. This is particularly the case when it comes to responsible investing with terms such as ‘Green’, ‘Sustainable’, ‘Ethical’ and ‘ESG’ thrown around without a clear definition of what they actually mean. Unfortunately, this leaves the investor unsure as to what they are actually investing in.

I therefore thought I would share with you how we currently approach responsible investing at Mangu Wealth Management. Our focus is very much on Risk, Return and Impact.

Responsible Investment

Firstly, we use the catch all term, ‘Responsible Investment’ to describe an investment approach which is designed to have a positive environmental or social impact.

We then use the ‘Spectrum of Capital’ map (as originally developed by Bridges Fund Management) to help identify the different types of investment approach that fund managers can take and the impact these may have on people and the planet.

The different types of investment approach can include:

ESG Integration

The term ESG – Environmental, Social and Governance – is one of the most over-used terms in the investment industry at the moment and one that causes a large amount of confusion.

For us, ESG Integration is where a fund manager takes into account ESG factors when analysing risk and making investment decisions. Often, in addition to their own research, the fund manager will rely on ESG scores from various ratings agencies although it is worth noting that there is no single ESG ratings framework. For example, one ratings agency might give Tesla a high ESG score whereas another might give it a low ESG score. Some of the world’s largest tobacco companies might receive a relatively high ESG score.

It is important to remember that taking into account ESG factors when making investment decisions does not necessarily mean excluding particular companies or industries. Many people investing in a fund that is labeled as ESG are often surprised to find that they hold shares in oil companies.

The investment industry tends to give the impression that ESG is a separate investment strategy or even an asset class in its own right. This is not the case, integrating ESG characteristics as part of the investment analysis is hugely important as a means to identify those companies which might exhibit higher levels of risk because of poor ESG scores.

Where companies are looking to improve their ESG responsibilities then Stewardship becomes important.

Stewardship

We like to work with fund managers who actively engage with companies to ensure that they are taking their ESG responsibilities seriously and to ensure that those who are seeking to improve their ESG scores are taking the necessary steps.

I think fund managers can add real value here especially in the Fixed Interest space where there tends to be less transparency and where they can ensure that companies use the money they borrow in a responsible way.

I also think that those fund managers who actively engage with companies can unlock significant investment opportunities especially where companies have made firm commitments to improve their ESG scores.

Exclusions

This investment approach is often referred to as ‘Negative Screening’ and is where a fund manager excludes specific sectors, business activities, products, companies or jurisdictions. For example, avoiding gambling, tobacco, fossil fuels or companies based in a country with a poor human rights record.

It is important that investors have a clear understanding of how the exclusion works and, again, there can be some confusion in this area as it can be very difficult to avoid a particular sector or business activity. For example, a supermarket will often sell tobacco products and lottery tickets. A multi-national company headquartered in the UK may have a small subsidiary in a country with a poor human rights record.

Often a fund manager will provide a caveat to the exclusion, for example, by saying that they avoid companies that generate more than 10% of their revenues from tobacco.

Sustainability Focus

This is where a fund applies a specific sustainability criteria, for example, by investing in companies that are helping the world move towards a low carbon future. Some funds might have a focus on renewable energy whilst others have a focus on green technology.

It is important to take into account the type of strategy being used, for example, some funds may apply a positive tilt by overweighting those companies with low carbon emissions and underweighting those companies with higher carbon emissions.

Positive Impact

These are investments that are made with the intention of generating a positive and measurable social and environmental impact alongside a positive financial return.

We work with fund managers in this space who will actively evaluate and measure the impact each holding will have within their portfolio. A number of Impact funds measure their impact against the UN Sustainable Development Goals.

Specialist Investments

For certain clients, we may recommend more specialist investments in companies that are looking to generate a positive impact. These investments tend to be aimed at wealthier and more sophisticated clients and they may benefit from certain tax advantages, for example, Enterprise Investment Scheme (EIS) Tax Relief or Social Investment Tax Relief (SITR).

These types of investments can be high risk, for example, an EIS qualifying investment may be in a start-up company looking to develop a new ‘green’ technology.

Working With Clients

We are, by design, a small boutique financial planning and wealth management firm. This puts us in a privileged position in that we can have in-depth and meaningful conversations with our clients around areas that they would like to invest in and areas that they would like to avoid. This is often not the case with larger IFAs and Private Banks who use lots of questionnaires as part of a box-ticking exercise and where clients can feel that they are just a number in a well-oiled machine!

Through our discussions we help our clients articulate their values and the impact they would like to see with their investments.

By also working closely with fund managers we can give clients a better understanding of where their wealth is invested and what level of social and environmental impact their investments are having.

Long Term Planning

When we work with clients to help them identify their desired lifestyle, often it involves implementing a long term financial planning strategy. We may put in place protection policies with a 20 or 30 year term; we may design a school fees strategy that might last 10 years or more; clients may accumulate capital over their working lives that may last 30 to 40 years for a retirement that may last 30 years or more. We may then implement an estate planning strategy that is designed to leave a legacy after a life spanning 80 to 90 years. More and more clients are realising that their desired lifestyle is intrinsically linked to how they invest. If you are planning to retire in years to come, what will the world look like if we continue to invest as we have done in the past - we may find that our dreams cannot be realised if we don’t address issues such as climate change and social inequality.

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If you would like to discuss how you can align your wealth with your values and make a positive impact, please do get in touch.

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Our Approach to Responsible Investing