Exactly why and when our ancestors stood upright and started moving around on two feet is still shrouded in mystery; however, we do know that following this development evolution favoured earlier births resulting in young that were essentially helpless for the first two years of their life. Surviving this evolving world required a support network, i.e. the idea of community developed. Pooling resources, supporting those unable to fend for themselves, young or old, was beneficial to the evolution of the whole community, which soon propelled the human species to the top of the food chain.
This model survived intact and evolved for millennia, until the dawn of the industrial revolution when the community structure started to transform as we set out to conquer the world as individuals. Since the first steam trains, technology has continued to rapidly expand our community. More recently, as technology has enabled greater awareness of inequalities, injustices and highlighted reckless abuse of our planet, trust in our global community has eroded. Social media has enabled values and principles to be shared on a global basis and has charged to the fore as a medium to share 'truths' and voice the injustices we see around us. We exist in an environment that tests our own values with increasing frequency, therefore it is not surprising that more and more people are questioning their investment choices relative to their own values and choosing to invest in companies that make a positive impact on the world.
Ethical standpoint vs investment returns
So what about the common perception that investors who focus only on companies that behave responsibly from an environment, social and governance perspective, do so at the expense of returns?
Where does the in-grained attitude that the sustainability of people and the planet must be detrimental to our wealth come from? In the 1960s and 70's Nobel prize-winning economist, Milton Friedman, in direct response to the prevailing mood of philanthropy argued that social responsibility adversely affects a firm's financial performance and that regulation and social care will always damage the macro economy. His contention that the valuation of a company or asset should be predicated almost exclusively on the pure bottom line (with the costs incurred by social responsibility being deemed non-essential), underwrote the belief prevalent for the rest of the 20th century, and is sadly still a view held by many today.
However, over the last 25 years a large number of studies have proved that companies that behave responsibly have been shown to make better financial investments. In fact these studies have shown that investing with a tilt towards companies that behave more responsibly has led to consistent outperformance, much of which can be directly attributed to specific environment, social and governance (ESG) factors. Digging a little deeper to understand why the share prices of such companies generally perform better over the long term, we find that ESG scores provide a superior quality gauge: weak scores have been shown to be one of the most reliable indicators of future volatility, earnings risk, and low return on equity.
At Aberdeen Standard Capital, our investment approach is predicated on quality and we recognise the importance of ESG factors in the decision-making process for all portfolios - not just those that are labelled ethical. Investing responsibly on behalf of our clients goes to the heart of seeking superior returns and maintaining client trust. Assessing these factors enables us to gain a far deeper understanding of the key risks and strengths of all investments.
Beyond this, there are a number of ways that we can express our values and make a difference through investments. The traditional and most frequently used method is still negative screening, i.e. screening out those investments that behave against our beliefs. For example, if we wish to express our views on human rights we can screen out those companies that score poorly on labour rights, child labour or supply chain labour rights. Another common example is to exclude those companies that have a negative impact on the environment through aggressive extractive practices, such as mining and oil production, or produce or sell products that are harmful to our health, e.g. tobacco.
But how can we invest for positive change, i.e. reward those companies that are actively aligning their operations and outputs for good? Enter 'Impact investing' - a term that emerged around 2007 and is the fastest growing means of ethical investing. 'Impact investing' involves investing in companies and creating investment portfolios that have the intention of generating positive, measurable, social and environmental impacts alongside financial returns. This is not about philanthropy; we believe both financial returns and impact can be achieved alongside each other.
We approach 'Impact Investing' by utilising the United Nation's Sustainable Development Goals (SDGs) as a framework for investing. At the start of 2016, the United Nations set an agenda for sustainable development to be achieved by 2030, with the aim of eradicating poverty, and addressing climate change, rising inequality and cutting unsustainable production and consumption. The SDGs are ambitious and estimates of the cost of achieving them range from $2 – 7 trillion a year. These goals will only have a hope of being achieved through partnership between governments, regulators, academia, philanthropists and the corporate world. Global asset managers – with over $80 trillion of assets under management – will have an increasingly important role to play if the SDGs are to be met. One way to support the aims of the SDGs is through impact investing. We believe this is an exciting way to provide our clients with the ability to both support this ambitious proposition, while generating a financial return through our Global Impact solution – a portfolio of investments that are actively contributing to achieving the UN's goals.
Our ancestors stood up a long time ago and supported their community. Now we have an opportunity to stand up and support our global community by making a real contribution to eradicate hunger, social inequalities, climate change and unsustainable production and consumption.
Julie-Ann Ashcroft, Head of Investments, Aberdeen Standard Capital
First published in Paraplanner Magazine June 2018.