The challenges and dilemmas faced by investors as they integrate non-financial factors into their decision making were explored by a round table of experts convened by Danish consultancy Global Fund Search (GFS) in Copenhagen in September 2024. The GFS panel brought together asset owners and managers, including Hiten Savani Portfolio Manager at Fidelity International and Clare Wood, Portfolio Specialist at Stewart Investors.
The rapid evolution of sustainable investment practices at Fidelity over the last decade and a half was partly driven by the demands of large Dutch asset owners looking to begin decarbonising their portfolios. At that time, managers were more focused on the “G” of ESG in their efforts to identify well-managed companies. There was a lack of data on greenhouse gas (GHG) emissions, with nascent scope 1 and 2 metrics still a work-in-progress and information on scope 3 emissions relying on estimates.
These initial difficulties meant that, following an initial dependence on external Fidelity International felt compelled to build up in-house expertise to compensate for data gaps and produce reliable proprietary data on environmental and social factors. This fundamental analysis fed into the company’s evolving sustainability views and strategies and is now a core component of many of its long-only and long/short portfolios, as well as informing the firm’s engagement with investee companies.
Stewart Investors has long operated an investment policy based on identifying a relatively small number of high-quality holdings in companies that it considers to be especially well-managed, as well as displaying franchise strength and solid financials. Building on this approach of backing high quality companies for the long term, it was a very natural evolution for the Edinburgh-based firm to launch its first dedicated sustainability fund in 2005 with support from Swedish investors. It believes that companies contributing positively to sustainable development face fewer risks and have access to more enduring opportunities over the long-term. Stewart Investors’ strategies invest in global, Asia Pacific, and emerging markets. The key for Stewart Investors is to focus on a very long-term investment horizon. They define risk as that of losing client money rather than underperforming a benchmark so portfolios look very different from the benchmark.
The experts also explored the potential pitfalls and contradictions faced by investors as they try to integrate sustainability into their process. All signs indicate that ESG considerations have become mainstream, the table seems to agree. A London Business School survey of 500 fund managers revealed that more than 75% of them systematically incorporated ESG into their decision making. This was apparently not driven by altruism but rather reflected a pragmatic awareness of the financial materiality represented by these new factors. The survey also highlighted the fact that ESG was on many cases a primary factor in decision making. Moreover, ESG risk mitigation and the long-term perspective sometimes meant investors having to sacrificing returns versus traditional portfolios.
Nevertheless, from Stewart Investors’ standpoint there are exceptional ESG-related returns to be made if you play your cards right, citing the examples of a specialist housing company that caters to low-income buyers and a green heating and air-conditioning firm that has benefited from energy efficiency initiatives. The panel expressed frustration with companies that fail to adhere to science-based decarbonisation methodologies and reporting, which can lead to them being excluded from sustainable portfolios despite the fact that divestment has little effect on real-world GHG emissions.
Sustainable investors often have to deal with contradictory situations and trade-offs. The participants discussed Unilever, which has long been considered one of the better major multinational firms in their sector at addressing ESG themes. It appears that competitiveness and cost considerations are putting a brake on these efforts, as the company tries to keep shareholders happy while maintaining its sustainable practices. Another example of ESG-related trade-offs is offered up in the form of Coloplast, a Danish company that provides much needed medical devices but could be penalised for its reliance on single-use plastics.
For the GFS-convened round table, the key to successfully navigating these contradictions, data gaps, and trade-offs is to maintain a close dialogue with investee companies. For Fidelity, this helps inform a more complete in-house evaluation of companies that complements the more rudimentary ESG ratings that are available from external providers. Engagement with companies is seen as the best way to help them improve and understand their long-term sustainability pathways. The consensus is that despite the difficulties, managing ESG risks and opportunities is now an inescapable part of investing and arguably part of a new, extended fiduciary duty towards underlying clients and pension scheme members.
