Measuring the impact of sustainable investing

Sustainable investing continues to push its way into the mainstream, and the new normal that is widely anticipated once Covid-19 recedes is expected to favour businesses contributing to the shift towards a cleaner, healthier and safer world.

A woman looking out the window

"Ongoing additional due diligence will be needed to ensure a fund's interpretation of 'sustainable' suits the end client, and is influencing investment decisions to an appropriate degree."

But with greater prominence comes greater scrutiny, and investors are understandably keen to know precisely what impact sustainable investments are having. Simple ad-hoc commentary based around investment performance and a few macro bullet points is no longer enough, and clients increasingly want to see proper alignment with sustainable goals such as decarbonisation, health outcomes and diversity targets met. Alongside the question 'How much has my investment delivered?' will be 'What impact on people and the planet have these investments had?'

As fund managers need to be able to address both issues, we continue to work on better ways to measure and disclose the environmental and social performance of our investments. This is even more vital against a rising tide of greenwashing, where asset managers say they take a sustainable or ESG approach to investing when it actually has a very limited influence on decisions as to where capital is directed.

While extra-financial performance has grown in importance, measuring impact can be challenging as there is no standard framework or simple metric available. Ultimately, however, the terminology used is not that important; call it impact or not as it continues to develop. What is important is how asset managers communicate this side of investment and how impact ultimately guides their investment process.

Over recent months, we have assessed a number of frameworks for disclosing the impact of the investments in our Sustainable Future (SF) funds. While there are many initiatives emerging, our conclusion has been that none of the frameworks we tried are useful -– yet. They have been a good starting point but too blunt a tool: they missed nuances due to mapping entire industries to the United Nations' Sustainable Development Goals (SDGs), for example, which fails to capture the divergence between companies within industries. It is exactly this divergence that helps us to find companies on the right side of our sustainable investment themes.

There is also regulation coming (EU Taxonomy, for example, which is part of the Green Finance Initiative) on how funds articulate their aims in relation to sustainability, as well as what information they need to disclose. While welcome, it will be some time before this enables investors and advisers to understand how funds are run. Ongoing additional due diligence will be needed to ensure a fund's interpretation of 'sustainable' suits the end client, and is influencing investment decisions to an appropriate degree.

In the meantime, our funds continue to contribute to sustainable development and we want to quantify this and communicate it to clients. We believe the best way to show impact is in the following ways, and have started to highlight these at the fund level across our range:

  • Clearly articulate how the portfolios are invested by both mega trend – Better resource efficiency (cleaner), Improved health (healthier) and Greater safety and resilience (safer) – and our 20 underlying themes within those.
  • Show how these themes contribute to the SDGs at the performance indicator level. The SDGs are an internationally recognised set of goals to aim for by 2030 that will help the world develop in a more sustainable way. They have captured many investors' interest as a more comprehensive way of thinking about and reporting on sustainable investing.
  • Engage with companies in which we are invested to measure the primary impacts of the products or services the businesses provide, as well as how they are managing the main impacts from operations. Engagement can be on company-specific issues as well as broader societal areas such as gender diversity, treatment of staff and management of global supply chains. It is also worth recognising that while we want more disclosure on positive impacts, you cannot ignore the negative and we continue to encourage companies to manage their operations and strategy to reduce any such externalities.
  • Independent analysis of how the funds compare to the markets in which they are invested in terms of carbon emitted, investment in climate change solution providers, and exposure to fossil fuels (which is zero). We are stepping up our engagement with companies to increase the pace of change on emissions, which is often slower than what science is telling us is required, by launching the One and a Half Degree Transition Challenge in January 2020. In our view, businesses that are proactive in reducing carbon emissions, and are able and willing to articulate this in their business strategy, will gain a competitive advantage and generate better returns. Those that do not will face increasing risks to their businesses. We have called for all companies held within our equity and bond funds to explain how they plan to decarbonise their businesses to limit global warming to 1.5 degrees. Our fund managers are using all measures at their disposal, including voting and ultimately divesting over time, to persuade companies to reduce emissions.

Measuring impact is a challenging and evolving discipline, but any asset manager seeking to promote its sustainable credentials has to be committed to developing an appropriate framework. In doing so, they will be better placed to satisfy increasing demand from clients who want to quantify the impact their investments are having on the real world.

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital.

Investments should always be considered as long term. Some of the Funds managed by the Sustainable Future Equities team involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.

Disclaimer

Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business. This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.