An ESG State of Mind

Henry James has a history of strong performance managing ESG funds. When CEO James O’Leary began working with ESG funds, the concept was far less developed, generally seen as being SRI (Socially Responsible Investing) and was important for investors with strong moral or ethical stances. Nonetheless, O’Leary helped set a precedent for what could be achieved with a successful ESG portfolio, winning 5 globes (denoting Morningstar’s highest possible sustainability ranking) for the mutual fund he controlled at the time.  These globes were earned due to O’Leary’s strict ESG investment methodology, the same methodology Henry James now applies to our own ESG funds.

Our Methodology

We follow the same strategy for our ESG funds as we do for any other – a combination of bottom up for picking stocks and a top down country weighting system. Once we have gone through these first steps we run an ESG check for the portfolios, and we are extremely strict about enforcing the rules. Not only do we steer clear of investing in obviously non-ESG companies (such as cigarette manufacturers) we also hold each company up to a strict set of standards and measure how well they are managing their ESG risks and opportunities.

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What We Look At

Climate and Environment

For every company selected by our standard methodology, we look to see what risk the effects of climate change pose to normal business operations for the company – would factors such as a rise in temperature interfere with the company’s ability to carry out its business? More than this, however, we examine the infrastructure of the business and assess how sustainable it is. Every company in our portfolio must have transport, water, and waste systems which are accessible and environmentally friendly.

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Ownership and Business Structure

This includes aspects such as the separation of the CEO and the Chairman of the Board, assuring there is no overlap in their responsibilities which could lead to a conflict of interest. Each company must have a transparent, ethical approach to their taxes and a system in place which easily enables shareholder engagement with the board and management.

Human Rights

It is of critical importance that every company in our ESG portfolio abide by the laws regulating human rights. This includes workers’ rights, land rights, indigenous peoples’ rights, and freedom of expression and any company which violates these will have no place in our portfolio.

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To learn more about ESG funds and how Henry James International Management could help you, please get in touch via email at info@hj-intl.com or by telephone on (646) 722-2739

The Rise of the ESG Fund.

In recent years, the popularity of, and demand for, ESG funds has increased due to a combination of ethical concerns and the additional risk mitigating benefits attached to taking ESG factors into consideration.

In fact, many have said that failing to consider the risk posed by poor environmental, social, and governance practices could lead to losses, both for clients and for financial advisors. Multi-asset portfolios with integrated ESG stocks are an easy way to make sure client portfolios are as diverse as possible with manageable investment risk and reduced portfolio volatility.

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Not only are ESG factors an excellent way to assess risk, ESG funds have been shown to perform just as well as conventional ETFs for the same risk. Last month, ESG funds had risen to $3.4bn – nearly 45% over the previous 18 months, with assets in ESG funds linked to MSCI indexes growing by 50% over 2015. The trend shows no sign of slowing down, with the majority of institutional investors taking ESG risk factors into account when making investment decisions.

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Last month, Morgan Stanley announced that they would be introducing two new ESG multi-asset funds, mirroring the strategy of their current Global Balanced Risk Control fund, which they believe is the best way to participate in rising markets while still providing strong downside protection. These new funds – the Global Balanced Fund and the Global Balanced Defensive Fund – are the first at Morgan Stanley to incorporate ESG factors into the process and promise to both improve returns and enhance risk management at the same time, an important consideration particularly amidst the post-Brexit uncertainty which still reigns.

money-1017463_1920In response to this growing popularity, MSCI has introduced a new suite of fund metrics, scores and rankings on FactSet to help institutional investors and wealth managers better judge the ESG characteristics of their portfolios. FactSet, which provides integrated financial information and analytical applications, will now offer a new level of transparency on the ESG quality of over 23,000 mutual and exchange-traded funds. These will be ranked or screened based on their sustainable impact, their values alignment and any other ESG risk, such as their carbon footprint, making it even easier for managers and financial advisors to respond to a client’s interest in sustainability.

To learn more about ESG funds and how Henry James International Management could help you, please get in touch via email at info@hj-intl.com or by telephone on (646) 722-2739

What IS an ESG fund?

ESG stands for Environmental, Social and Governance and, when discussing investment, is primarily used to describe companies for whom these factors are a priority. ESG funds are investment portfolios which comprise companies who conduct business with sustainability and ESG factors in mind. Although initially a fairly rare entity in the investment world, there is increasing evidence to suggest that integrating ESG factors into investment analysis and the construction of portfolios can actually help boost long-term performance.

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ESGs first came onto the investment scene in the 1950s and 60s and were largely the creation of various Trade Unions. Two of the first were the International Brotherhood of Electrical Workers and the United Mine Workers who invested their considerable capital in affordable housing and health facilities respectively. The power of thoughtfully-invested capital for social change was not truly felt, however, until 1971, when a board member of General Motors drew up a Code of Conduct for practising business with apartheid-era South Africa. So many companies failed to comply with this code of conduct, that it resulted in a mass disinvestment from South African companies, a movement which greatly contributed to the end of apartheid.

 

In spite of this, the generally-held idea until the late-80s was that social responsibility was wont to have an adverse effect on a firm’s financial performance. Nowadays, however, many believe that ESG factors can actually be used to help identify businesses with superior business models, offering portfolio managers additional insight into the quality of a company’s management, risk profile, and culture.

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ESG takes into account a range of environmental concerns – such as climate change, nuclear energy, and sustainability – social concerns – such as consumer protection, human rights, diversity, and animal welfare – and corporate governance concerns, including management structure, employee relations, and executive compensation. These three factors are inextricably linked to the concept of responsible investment, which uses various methods to control the placing of investments. These include positive selection, integration, and activism.

To learn more about ESG funds – or to find out about the ESG international equity investment products that are available through Henry James International Management – get in touch via telephone on (646) 722-2739 or email at info@hj-intl.com and tune in to next week’s blog.