ESG: A package deal

From the outside looking in, sustainable investment analysis may seem like information overload. Amid all of the data, is it possible to see both the forest and the trees? Rathbone Greenbank deputy head of research Kate Elliot says yes.

Countryside lane

Every once in a while, I need to immerse myself in nature. Like anyone else, the trappings of the modern world can feel a little overwhelming at times, be it parenting, Zoom calls, or simply braving  B&Q on a rainy Saturday afternoon.

Sometimes nothing clears my mind and recharges my batteries better than finding a quiet trail in the countryside where I can escape the noise and business of the city. It’s the simplicity of it that I like – especially after a working week spent trying to make the complicated seem straightforward.

I imagine many investors might feel overwhelmed by the information being thrown at them, particularly on the sustainability side of things. For starters, no one can decide what to call it. Is it responsible investing? Sustainable investing? Ethical investing? Impact investing? Talk about a big hurdle to clear before we’ve even got started.

Then there is the question of how anyone determines if a company can be considered truly sustainable. There are so many variables and criteria, you’d be forgiven for not knowing where to begin or how to make sense of it all.

If you spend too much time looking at all of the individual parts in isolation, you can quickly lose track of it all and you won’t be able to see the wood for the trees. You need to step back and take in the bigger picture.

There is an increasing quantity of data and metrics for determining a company’s sustainable investment credentials, ranging from carbon emissions to governance and corporate culture. Our sustainability and Environmental, Social, and Governance (ESG) framework includes 30 top-level criteria and then a further 300 sub-criteria that we can choose from when assessing the sustainability credentials of a given company or entity.

We filter out the noise and decide on the most important issues given our understanding of a company’s activities and the industry in which they operate. The information we collect is then run through an algorithmic process that generates a score for each company on each issue that we assess.

But we don’t just blindly follow the numbers – this ranking system helps us determine a company’s sustainability strengths and weaknesses, but just as important is our overall assessment of corporate culture and its commitment to sustainable development. Many companies talk the talk and produce mounds of data and reports designed to convince the world of their achievements, but quite often once you scratch the surface it becomes quite clear they aren’t walking the walk.

So, by looking at how a company is managing environmental, social and governance issues we can get a good idea of whether or not it is appropriate for a responsible investment portfolio. And it’s important to take a holistic view. Of course, it’s great if a company has moved to fully renewable energy and built a sustainable supply chain, but what if it also has a negative corporate culture and is known for serious health and safety breaches – how do you balance these different aspects?

Some critics suggest that bundling ESG together in a single fund results in a lack of focus and instead they should be tackled individually. The theory goes that if you want to invest in companies that are friendly to the planet and will help to reduce pollution, focus on the E in ESG, while if you want to invest in companies that will perform well financially, focus on the G, and so on.

The problem with that thinking is that it suggests the three are not connected in any way. Sure, a company does not need to be sustainable to have good corporate governance, but that isn’t the point of responsible investing. Our aim is to build investment portfolios that contribute to sustainable development and you can’t do that by focusing on a single issue in isolation. For example, you’re not going to solve climate change without looking at food and nutrition, inequality and water security.

We could focus entirely on the environmental side of ESG, but that will mean directly ignoring at least half of the 17 Sustainable Development Goals, and indirectly undermining many of the others. This is why we think it makes sense to take a wider view. Of course, individual companies or entities might be focused on a particular issue, and that’s fine, but we need to make sure that their activities or business practices aren’t causing harm in other areas. 

In an ideal world, companies would work this out themselves and focus on operating as responsibly as possible. But that doesn’t always happen and so investor engagement is hugely important in shifting the dial. If investors like us didn’t prod companies and their management teams to up their game across a range of sustainability issues, then I doubt ESG would have made as much progress as it has so far.

Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

Rathbone Investment Management Limited ("RIM") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No 01448919.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.

Subscribe to the In the KNOW blog email

Archive