Getting the benefit from responsible investing

Investors are looking beyond traditional measures of investment success to enhance the long-term returns on their investments.

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In our 2019 investment outlook, Children of the Revolution, we look at the impact of responsible investing. As we discover, investing now means more than just being a passive beneficiary of investment returns: Investors Have Power.

We asked Leslie Gent, Head of Responsible Investing at Coutts, why responsible investing is taking an increasingly central role in the way asset managers choose investments.

Why does Coutts think responsible investment is important?

We’re long-term investors and so we see anything that enhances long-term returns as a good thing. We’ve always tried to look beyond the traditional investment considerations that drive a lot of investment decision-making. This helps us understand the factors that could affect a company’s profits and opportunities in the future. Responsible investing gives us a lens to look at some of the more qualitative factors that can influence how well a company does over the long-term.

Responsible investing typically covers three main areas, frequently abbreviated as ‘ESG’:

The environment – what impact a company has on the resources that sustain it, either directly or indirectly
Social factors – covering things like workers’ rights, how a company treats suppliers or interacts with the communities it operates in
Governance – looking at topics such as transparency of decisions, directors’ pay and internal controls

There’s increasing research showing that companies which treat these issues seriously can deliver more sustainable returns. That makes it an important part of the investment journey, especially for long-term investors like us.

“We are seeing considerable interest from governments and regulators on safeguarding the financial system by building more sustainable economies. Good governance and social responsibility in the corporate world have the potential to make a big contribution to creating this stronger economic base.”

Leslie Gent, Head of Responsible Investing at Coutts

What impact has it had on Coutts investments?

There are three ways we apply responsible investing techniques.

Firstly, analysing a company’s ESG factors complements our fundamental analysis. This helps us make sure that we’re investing in companies with sustainable policies.

Secondly, as part of our due diligence process we assess the responsible investment policies of the managers of third-party funds that we use to construct client portfolios.

Lastly, we work with a third-party company, Hermes EOS, to engage privately with companies to make our voices as shareholders heard. This includes talking directly with company management and voting in line with our voting policy at their board meetings on issues ranging from executive pay and board structure to human rights and climate change. In this way we can help to influence their policies and effect positive change, which we believe will improve long-term financial performance.

How do you see responsible investment evolving and influencing markets in the future?

We are seeing considerable interest from governments and regulators on safeguarding the financial system by building more sustainable economies. Good governance and social responsibility in the corporate world have the potential to make a big contribution to creating this stronger economic base.

Environmental risk has been acknowledged as a key risk to global welfare. Norms are changing quickly and we are beginning to see signs that the transition to a lower-carbon society has begun – but there is still plenty to do. Investing with an eye on environmental challenges can help to accelerate the changes that are needed to ensure the long-term wellbeing of our natural environment.

We’re seeing growing demand for sustainable investments. It’s part of a general consumer trend you can see in other areas – for example, reducing dependence on plastic packaging or choosing to buy ethically farmed produce. People are starting to raise similar questions about their investment products and making decisions about where they invest accordingly.

When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

Key Takeaways

Responsible investing seeks to enhance long-term returns by focusing on the way companies behave rather than the bottom line. Broadly, it considers a company’s approach to the natural environment, positive social policies – such as supporting fair pay and workers’ rights – and robust and transparent governance and decision-making. These are often abbreviated as ‘ESG’.

As well as investing in companies that score positively in these regards, responsible investors also engage with company management and use the voting powers that come with share ownership to encourage good practice.

At Coutts, we have embedded responsible investing considerations into our investment processes, in line with our approach as long-term investors. We also engage with company management and use our voting powers to influence their behaviour.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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