Through our work as a responsible investment team, we aim to achieve a thorough understanding of the environmental, social and governance (ESG) factors that might influence investment opportunities and risks, and we seek, where appropriate, to try to improve the behaviour of investee companies.
We publish reports quarterly on our responsible investment activities, which provide details of voting decisions and research and engagement undertaken by the team. In addition, we publish thematic reports on topical and relevant ESG issues.
Below we set out some of the key trends we’ll be looking at over 2018.
Trend 1: sustainable investing
Across the world, investors are becoming more interested in the integration of ESG considerations in their portfolios in pursuit of better risk management and sustainable, long-term return generation. This reflects a developing global interest in sustainability issues more generally, as well as a growing desire (especially among the millennial generation) to invest in companies which manage positively the material impacts of their operations and products on society.
We have seen notable client interest for sustainable products over the last year which we only expect to increase. This month, we launched a new Sustainable Global Equity Fund as part of our plans for a sustainable strategy range which builds on our work in responsible investing over the last 40 years. This range includes a Sustainable Real Return strategy and a Sustainable Sterling Bond strategy, as well as a Sustainable US Equity strategy which was launched for US investors in May 2017.
Trend 2: climate change
Climate change is likely to remain at the forefront of financial market participants’ minds in 2018 and beyond, and we expect investors to be challenged to disclose what they are doing in terms of identifying and taking action on climate-related risks and opportunities. We have received a number of client and prospect queries on this matter, and this year, for the first time, asset owners will be asked in the PRI’s (Principles for Responsible Investment) annual survey to disclose how they are integrating climate thinking into their strategies.
Investors are increasingly joining together to collaborate on how to tackle the issues and take advantage of the opportunities. We believe this is an effective way for the industry to make progress in this area, and in November last year we signed up to the Institutional Investor’s Group on Climate Change (IIGCC), a group of 150 members representing over £19 trillion of assets under management. The forum provides access to international policymakers, collaborative engagement groups and discussions at the forefront of climate policy and investment practice. We have also joined another collaborative investment group, Climate Action 100+, a five-year investor-led initiative (with combined assets under management of £20 trillion) which works to engage with the world’s largest corporate greenhouse-gas emitters to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures.
Companies themselves are also increasingly being held to account on their commitments in this area. Take the Task Force on Climate-related Financial Disclosures (TCFD) for example. Spearheaded by Mike Bloomberg and Mark Carney, the organisation provides recommendations on the climate-related information that companies should disclose to help investors make sound financial decisions. We will continue to integrate the recommendations made by the group in our engagement with companies over the coming year, and a member of our team sits on the PRI TCFD advisory group, which aims to establish recommendations for company engagement on this topic.
Trend 3: cyber security
In 2017, there were a number of high-profile cases of computer hacking – most notably relating to the WannaCry software which hit over 10,000 organisations and 200,000 individuals, and the Equifax attack, which exposed the data of about 143 million Americans. The sheer scale of both these incidents was perhaps an insight into the quality of global corporate IT systems and the extent of the challenge to update and protect critical systems and sensitive data.
We suspect that many businesses are woefully unprepared for this risk; PwC’s 2016 Global Economic Crime Survey found that only 37% of the organisations surveyed had a cyber-incident response plan. Companies are unlikely to be able to stop attacks, so a well-planned response is vital. Compounding the issue is the fact that hackers are able to act much more quickly than companies.
Furthermore, it isn’t just the risk posed by external threats which companies need to consider, but also the risk that intellectual property is subject to internal theft. While this may not be front of mind when evaluating security gaps, it is a serious consideration for companies that rely heavily on research and development.
Research suggests a significant need to improve board-level, strategic understanding of cyber risks at companies, with accounting firm EY, for example, revealing that 87% of board members and C-suite executives lack confidence in their organisation’s level of cyber security. As such, this is a key responsible investment research and engagement topic for us across all sectors.
Trend 4: holding individual directors to account
A number of corporate governance commentators are currently discussing the potential use of a currently underused section of the UK Companies Act as a means for shareholders to hold individual company directors to account. Section 172 of the Act states that ‘duty to promote the success of the company’ includes calls for directors to always act in the companies’ best interests while having regard for its employees and the impact of the company’s operations on the community and the environment. We don’t know yet exactly how this will play out as the legislation is quite open- ended, but we are watching this area with interest.
Trend 5: Brexit side-effects
As London fights to retain its position as the dominant financial centre in Europe, there is the potential for shareholder/investor protection to be reduced for the sake of short-term wins. There is a possibility, for example, that listing rules which protect minority investors will be relaxed in order to allow companies to list on the UK market. Again, this is an issue we are monitoring carefully.