• 07/09/2017

Under the ESG Microscope

Under the ESG Microscope

Standard Life Investments tells BENCHMARK how it uses ESG criteria to spot well-rounded companies.

BENCHMARK (BM): Standard Life Investments is doing groundbreaking work in bringing ESG issues into the investment process. Please outline your latest developments and achievements in this area.

Standard Life

Amanda Young

Amanda Young (AY): Standard Life Investments has two expert teams with resources dedicated to understanding ESG matters: the responsible investment team and the governance and stewardship team. These teams work hand-in-hand to deliver enhanced analysis to the Standard Life Investments process. The responsible investment team engages on environmental, labor, human rights and business ethics matters, while the governance and stewardship team focuses on corporate governance matters, broader stewardship matters and dedicated engagement on issues, such as board composition, shareholder rights and remuneration.

Last year, the responsible investment team was strengthened by the addition of a new head of responsible investment who has 17 years of investment experience (13 in the responsible investment field). We also increased the team to four dedicated responsible investment professionals.

BM: Tell us more about your stewardship and responsible investing principles.

AY: Companies can no longer operate in isolation. Their business activities have a profound impact on the societies and environments in which they operate. It is imperative for investors that the companies in which they invest in operate to the highest standards to minimize their impact on the environment and society. Not only is that the right thing to do, but also these matters may impact a company’s continued license to operate, its reputation and its ability to attract top talent.

As a leading global asset manager, we recognize the increasing importance of governance and stewardship to clients and the vital role that asset managers have in holding the boards of companies in which they invest accountable. As such, we too have to be accountable for how we fulfill our governance and stewardship responsibilities. We have the financial strength and a professional reputation to open doors and we take our responsibility as a shareholder very seriously. Where possible, we use our influence to encourage best practice standards in companies’ management of social, environmental and governance issues.

BM: How do you ensure ESG analysis is meaningful and is of high quality? Is there a danger that ESG practices may amplify illegitimate stakeholder voices?

AY: The key is to focus on the materiality of these issues to the investment process. In addition, the analysts and fund managers need to be part of the dialogue you have with companies on material ESG issues. We employ experienced ESG professionals to ensure we have a deep understanding of an issue. For instance, our responsible investment team has over 26 years of experience in ESG research, and our research providers provide basic research in responsible investment and governance issues. We also work with the sell-side research houses to encourage high-quality analysis of how these issues are material to the business. We have conversations with a range of stakeholders to understand the societal trends around us. This includes speaking with academics, NGOs, government agencies, other analysts in the field and the companies themselves. This way, we are able to focus on what is material and determine how we should ignore the noise.

BM: Philosophically speaking, is ESG the right way to go into investments? Has there been any proven link between environmental or social performance and financial performance?

AY:The boundary between what is morally right and what is legal has shifted significantly over the last decade. It is no longer acceptable to operate merely within the confines of the law. Increasingly, society expects companies to be good corporate citizens, to take responsibility for their actions and to provide social and environmental benefits. Companies that fail to address these issues may face boycotts, reputational damage and lawsuits from activists, all of which are harmful to the share price of a company.

There have been a number of academic studies to suggest a financial link between a company’s performance and their corporate responsibility. It makes business sense. Any company managing all aspects of its business well, including its ESG impacts, will be a better managed company and more likely to outperform and provide stable investments over the long run.

BM: Can you give us a few differentiators in your pervasive adoption of ESG and SRI principles? How does your “Focus on Change” philosophy serve as your SRI fundamental?

AY: The firm participates in a number of key industry associations, such as being a signatory to the UN supported Principles for Responsible Investment (PRI). Our head of responsible investment is a main board director of the UK Sustainable Investment and Finance Association (UKSIF) and has also served on the steering group of the PRI-led collaborative engagement initiative on employee relations. Our head of governance and stewardship chairs the Corporate Governance Forum. Other association involvement includes the Asian Corporate Governance Association, CDP, EITI and International Corporate Governance Network, to name just a few.

Recently, our responsible investment team produced a note on air pollution in China, following internal research and discussion that focuses on an environmental theme that has the ability to provide both investment risks and opportunities to us as a house. We plan to produce more thematic pieces throughout the year. Our quarterly global outlook articles also incorporate comments from the teams that address issues, such as the challenges of the lack of auditor choice and the growing demand for ESG integration. All these elements of our work support our “Focus on Change” philosophy.

BM: Do you start with a sector-based or an asset-class approach when researching how companies manage CSR issues? What other factors do you consider before investing in a company?

AY: Our approach falls into three strands: sector, company and thematic. For the sector strand, it is essential to focus on what is material to our investments. For example, if we are significantly overweight as a house in a particular sector, reviewing this sector’s ESG risks and performance will be essential. For the company strand, we ensure that we have analyzed and spoken with companies where the company has the biggest financial exposure. And for the thematic strand, we analyze environmental and social themes that will have a bearing on different stocks across different sectors. These themes include supply chain issues in Bangladesh, air pollution in China, anti-bribery, stranded assets and climate related risks.

BM: What are the key identifiers of a good SRI company with good stewardship and risk management?

AY: It is essential for any board to have ownership of its ESG impacts. Those companies that are managing their approach to sustainability well tend to be those with leaders who genuinely believe in the importance of corporate responsibility. Companies must have the right policies in place. The company must set and report on key ESG performance metrics and this reporting must be overseen and owned by the board. For instance, global companies that have failed to introduce robust anti-corruption policies to address business ethics, such as ensuring whistle-blowing mechanisms are in place and used by its staff, are exposing investors to significant operational and financial risks.

BM: What is the “Learning Gateway” objective for investor education and is it achieving its goals as intended?

AY: This will vary around the world. Some investor markets are more enlightened, shall we say, towards the importance of these issues than others, such as the Dutch, where some of these matters are enshrined in law. However, what works universally is to use the same language as mainstream investors. Once investors understand this is fundamentally an important risk management tool and a good indicator of the quality of company management, it makes sense to them and they buy into the importance of ESG matters. BM

Amanda Young is head of responsible investment. In this role, she is leading a team of analysts who assess the environmental and social aspects of Standard Life Investments’ portfolios. Prior to joining Standard Life Investments, Amanda was the SRI officer at Newton Investment Management where she integrated environmental, social and governance matters into Newton’s investment process. Before joining Newton, Amanda worked at CCLA Investment Management where she established a formal responsible investment policy for CCLA’s charity funds and conducted voting and engagement activities on behalf of CCLA’s church and charity clients. Amanda started her career at Rabobank International in the economic research department. She graduated from Lancaster University with a Bachelor of Science in Psychology and is a main board director of the UK Sustainable Investment and Finance Association.