Doing well by doing good

Category: Asia, Middle East, Global, Europe, Africa
By Nazneen Halim

Columbia Threadneedle Investments goes from strength to strength in the ESG space

Iain Richards, head of responsible investment for Europe, the Middle East and Africa (EMEA) at asset management firm Columbia Threadneedle Investments, is fascinated by the positive direction in which environmental, social and governance (ESG) investing is moving. One of the reasons, he says, is the way in which technology is evolving – from renewable energy to artificial intelligence (AI), making him very much enthusiastic about the future for ESG investors, asset managers, and the world in general.

Mr. Richards’ background is rich with experience in policy. He served on the policy group of the UK’s Listing Authority and the London Stock Exchange, and was also responsible for leading the UK investment industry’s successful lobbying to re-establish the overarching “true and fair view” principle of accounting in UK company law.

In an exclusive interview with Asia Asset Management, Mr. Richards discusses the performance and prospects of ESG funds, and reveals why the future of ESG is undeniably bright.

Asia Asset Management: Please describe to our readers what Columbia Threadneedle is doing in the ESG space…

Iain Richards: In terms of ESG, what we’re trying to do is understand what the quality characteristics are – such as: How well is this business run? What are the risks inherent? Is management focussed on issues that are material to the business? What are its exposures to risks from its operational activities, and how is it investing? How is its intellectual property and R&D (research and development) supporting its ability to grow market share and generate cashflows? And how adapted is the business to a changing world – this could be environmental issues, demand for infrastructure and economic development, etc. All of these themes are drivers of performance growth and opportunity. So, looking at these issues in that sense is vital to ESG. What we’re doing is providing comparable solutions that are solid and sustainable in the long-term, and the whole idea is to reduce the cost of capital to entities that need funding, and doing it in a way that provides attractive returns to our clients.

How does this work in practice?

We run a federated model. We don’t have huge teams, and we like to keep it that way. What we want is to give our clients the best investment experts. Therefore, the fund manager who runs the mainstream (non-ESG) portfolios will also run the ESG portfolios; and the benefit of that is you get the best fund manager, and the mainstream portfolios benefit from a spill-over effect. Their understanding and experience of integrating ESG in a dedicated strategy then spills over into the mainstream strategy. Analysts and the debate around it is joined up, so it becomes a natural part of the process. And what you see in the industry is that people who have that exposure are much more broader-minded, much more open and dynamic in giving that solution to clients.

What trends are you seeing in ESG investing?

We expect to see continuing growth, but obviously different regions and different markets at different stages of development have different approaches. Even within Europe, which is often tagged as being one of the more advanced regions in ESG integration, you see some quite significantly diverse approaches. In different countries as well, clients take a distinctive view to what they are trying to gain through ESG. I think that highlights the key points, and key lessons that people should think about when they start to look at ESG – which is, what are they trying to achieve? What’s important is not having a plug and play solution, but thinking through what our objectives are, and what do you want to have reflected in our strategy, that’s important to us and our beneficiaries and associates. For example, it might include the integration of values. We have plenty of clients that have fundamentally-held values and beliefs that they might want to have integrated into their ESG strategy. That might be a mixture of quality standards, avoidance of commercial activities that conflict with those values – classic examples are gambling, alcohol, adult entertainment, etc.

My job entails integrating their values and beliefs and ensuring what the risk-return characteristics would be in delivering for them.

How is investment performance impacted by ESG selection criteria?

If you’re doing it properly, you don’t have to give up any financial performance. If you look at it in a very dogmatic way, you risk suffering because you’re not able to take the best opportunities; where companies have turned around and are improving, what you see is momentum and a re-rating of a business. So, if you’re too dogmatic about it, you miss that upward momentum. If you take a more passive ESG approach, you could stand to lose as well because those indices on the most part are market-cap rated. What you’re doing is channelling capital into what’s large and creating incentives to be big. Doing ESG in this (dogmatic) manner makes it lose its pragmatic, intelligent application. Intelligent application is important, as it’s very important to look at investments from as many aspects as possible.

Take social bond funds for example, these are funds that invest in projects that support society, economic development, job creation, etc. This is the provision of funding for social housing, community services, access to services, and a range of activities that revolve around how you deliver the financial performance in a way that has additive benefit. Because a lot of people think that in order to have that, you have to give up financial performance, and you don’t. In short, how can you do well by doing good? And that concept is where you see the leading edge of responsible investment going. It’s about putting capital to use with purpose.

What do ESG clients value the most, on top of performance and purpose?

One of the most important things to get right in this space is the transparency and accountability to clients. What we tend to find, particularly in the outcome strategies, is that we’ve had levels of feedback that we haven’t seen elsewhere. The younger generation and millennials, in particular, are very much interested in the stories behind the investments. Our clients love knowing what the money is being used for, and they really love the war stories – apart from seeing the returns. Therefore, you get an engagement that is often lacking. There are a lot of constituencies that have become disengaged and disintermediated from investment, and this is an area where responsible investment can add a lot of value.