Ethical Investing

The concept of sustainability goes back longer than one might suspect. In eighteenth and nineteenth century Europe foresters became so concerned that deforestation was harming the economy that they came up with a concept that forests should be managed so as to produce a relatively constant or sustainable yield.

Fast forward to 1987 and the Brundtland Commission of the United Nations crafted a new definition: sustainability is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.

Since then sustainability has been extended to the three pillars of the economy, the environment and society with sustainable investment taking all three into account. From an investment point of view, there are good reasons to look at the environment and society. For the last few years legislation has been put in place to encourage companies to limit their carbon emissions, for instance through the Carbon Reduction Commitment Energy Efficiency Scheme in the UK. Not only will companies which ignore compliance with the scheme risk being fined, but there is reputational risk from being seen to be not acting in an environmentally and society friendly way. Car manufacturers have picked up the environmental and social changes which are affecting their market and have reduced their production of gas guzzling SUVs to concentrate on fuel efficiency and smart cars.

Sustainable investment is a way to tap into these trends and the Sustainable Balance Fund puts this into an investment structure that provides a sustainable solution to an investor with a balanced risk profile. Risk is diversified in the portfolio by investing across a number of asset classes and across a number of geographies. The fund combines global equities, bonds and alternative investments (such as timber) which have all been chosen for their sustainability. We have appointed investment managers Sarasin & Partners LLP to run the direct equity and bond portfolios of the fund. They have an extensive sustainability research resource in Switzerland and long record in making sustainable investments. Recently, Sarasin was awarded with the “Best private bank for socially responsible investing” Award for 2010 by The Banker and Professional Wealth Management. The investment overlay and choice of alternative investments is made by 7IM.

In choosing investments for the Sustainable Balance Fund, many industries or business segments which currently seem to be financially attractive are so exposed to risks that they are excluded at the outset. These include companies which earn more than five percent of their sales from nuclear power, weapons, chlorine and agrochemicals, tobacco, pornography and GMOs (genetically modified organisms) used in agriculture.

When rating companies, the relevant environmental and social criteria are systematically analysed. This is based on comprehensive sector-specific criteria and assessments of how environmentally friendly companies’ products and manufacturing processes are in practice. This analysis considers the entire product lifecycle, from pre-production sourcing, through to production, use and disposal. The social analysis is based on the stakeholder concept and examines the company’s relations with its employees, customers, suppliers, investors, the general public and the state. The sustainable investment universe looks at industry and company ratings. While there are some industry exclusions, others such as the car industry are permitted but are recognised as higher risk than say the telecoms industry. In terms of choosing companies this means that it would be easier for an averagely sustainable telecoms company to be included than an averagely sustainable car company. How this works in practice is shown in the table below. The results of sector and company analysis are analysed using a matrix which plots the sustainability of the sector on one axis and the sustainability of the company on the other axis. The companies in red are excluded at the outset, but of the analysed companies only those which fall in the upper right segments form part of the investment universe.