Socially responsible investment (SRI) investing has made a quantum leap on from its origins in negative screening back in the 1970s. Today, we see SRI as a way of adding value for our clients as well as promoting good environmental and social practices and sound company management. Indeed we believe the above go hand in hand.
As a result, the way we analyse our SRI investments has become that much more sophisticated, allowing us to examine companies in the light of issues that affect society but also with the correlation to their share price performance in mind.
If anything, SRI considerations now provide an additional layer of information that we can apply to our fund management services.
Of course, that all sounds well and good – but where’s the value-added?
At Morley, we believe that the only way to succeed and back up our arguments is by producing positive returns. Good corporate governance is integral to that belief. Unless you have solid corporate governance none of the other issues that SRI is trying to achieve can happen.
Keith Jones, chief executive officer at Morley Fund Management puts it succinctly: “As investors, we increasingly believe that good environmental and social practice is synonymous with good management of companies and, in turn, good share price performance.”
The underlying premise for this investment philosophy is that there will be a necessary shift this century by world economies from environmentally and socially unsustainable practices to sustainable growth. The companies most likely to grow most consistently will be those that are promoting or benefiting from sustainable development.
In turn, our investment approach is one of identification of companies that are already making the link between sustainable investment and long-term positive returns and engagement with those that may have some work to do.
Similarly, our approach towards our clients is one of working with the grain.
Application of SRI principles to a pension fund portfolio, for example, should not involve an asset manager being dictatorial and saying you should screen out this stock or that company. In reality, it’s an issue of where an investor draws their parameters in terms of including or excluding certain SRI factors. Following that, it is a question of discretionary engagement with those assets that a fund may hold.
It is vitally important that this process is transparent to both the pension scheme and to any company involved. All parties should know what you are doing and why, if there is to be any improvement. On top of that you have to be consistent.
With these principles as the foundation blocks, Morley devised its sustainable matrix system, which is used by our analysts when deciding on any investment.
These assess the company’s policy and practices for comprehensiveness, effectiveness and disclosure. The vision of management and its ability to identify and manage risks are also considered. This dual approach recognises that it isn’t enough for companies to improve management practices without taking into account the social and environmental impacts of their core business.
The importance of the matrix system does not just rest at its value as an investment analysis tool, however. In Germany it was the deciding factor that made Morley the first ever manager to gain approval to market a SRI fund, which we sell through insurance group Delta Lloyd.
When we first approached the German regulator we were informed that we would not get authorisation to sell ethical funds on the grounds that there is no equality in moral viewpoints so a buyer would not know what kind of product they were getting.
The German regulator was looking for a robust and transparent process so people could see the way that investee companies were being graded. Morley’s matrix system finally provided a framework for SRI investment that satisfied the regulator and allowed us to get approval for our fund.
As well as Germany we are also due to roll out our SRI fund range in the Netherlands in March this year, again through Delta Lloyd.
In Ireland we sell SRI funds through Irish asset manager, Hibernian.
Significantly, in three different countries there are three different slants on SRI investment.
In Ireland the funds we have launched have been targeted at the charity sector where a good deal of the money comes from religious orders. Here the primary SRI concern is with human rights issues, with environmental concerns coming lower down the list.
Conversely, in Germany the SRI interest is shaded by an environmental agenda.
In Holland it is a combination of the two.
This brings me back to our client approach and how necessary it is to work with clients rather than adopting a finger-wagging stance on certain stocks.
With pension schemes it is essential to look at what their concerns and their financial objectives are and marry the two.
The result has been that the work in the SRI arena by managers like Morley has brought SRI into the mainstream. Some of Europe’s largest pension schemes such as PGGM and ABP in the Netherlands have now adopted a sustainable approach to portions of their investments.
These moves into the area of SRI by pension funds of such size and influence have been supported by the proliferation of reports in the last few years that show that sustainability pays in terms of performance. No one can accuse the SRI industry of ‘wooly’ thinking today. The figures speak for themselves.
The knock-on effect has been the ever-increasing professionalisation of the sector. It used to be difficult to attract top class analysts to run SRI funds. Not any more! Our increased ability to assess companies with our sustainable criteria, as well as looking at how it impacts on their financial performance unites our two goals; to deliver superior returns to our investors while at the same time promoting corporate responsibility.
These issues are not in conflict. The more companies that treat their employees better, examine their reputation, insist on clear disclosure, minimise supply-chain risk and maximise environmental management, the better – both financially and sustainably. Companies are driven by the bottom line, but the bottom line should be long-term profit rather than the short-termism and opaqueness which we have seen in recent times to disastrous effect.
For our part as investment managers we have to keep improving the way we provide sustainable investment information for investors and the ways in which we engage with corporations.
To this end we have developed the Morley ‘Sector Sustainability Blueprints’, which are tools for identifying social and environmental risks and opportunities within particular industry sectors. The sustainability blueprints aim to communicate from a sector specific perspective our decisions for giving a company a particular rating, by integrating various criteria into our matrix system. The blueprints also aim to give companies an idea of what they should look to achieve in order to move up the matrix.
We use the Bruntland definition of sustainable development, which is to ‘meet the needs of the present without compromising the ability of future generations to meet their own needs’. An integral part of our strategy is engaging with companies to analyse risks and opportunities inherent in their businesses and we believe this is best undertaken through face-to-face dialogue with company management. We hope that the sustainability blueprints will assist us in communicating SRI issues more effectively to companies. During this year we will be holding a series of sector round-tables with a range of companies, government bodies, consultants, NGOs to discuss issues such as what an ‘A’ rated transport company might look like for example. The idea is to get as broad a consensus as possible on how the sector ratings work.
This autumn we will also launch ratings for the Eurotop 100, grading companies on their sustainability value – a concept that we started last year with the grading of the FTSE 100 companies, and which made the front page of the Financial Times!
I had planned to end this article with a justification of why now is a good time to invest in SRI.
However, I think it is more effective to let the facts stand for themselves.
In the box above I have included our latest ‘SRI watchlist’ for 2003. When you consider the potential impact, both direct and indirect to companies of any of these issues, I’m sure you will agree that SRI is no longer just an investment concept, it is an investment reality.






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