Our sustainable fund range

Anna Mercer

Hello, my name is Anna Mercer and I'm a Responsible Investment Analyst at Square Mile Research.

We at Square Mile are very excited to be working with Royal London on this project which consists of a series of educational videos designed to help advisers debunk the confusing jargon in this space and to accelerate the adoption of a common set of terms.

In this video, we focus on the area of sustainable solutions and how Royal London is applying this approach within its investment processes. At Square Mile, we define a sustainable solutions fund as one which seeks to invest in companies that are providing solutions to social and environmental challenges through their core products and services in the belief that this will realize the long term financial benefits.

I'm delighted to be joined by Mike Fox, Head of Sustainable Investments and a Fund Manager at Royal London Asset Management to discuss this further.

So, Mike, perhaps we could start with the objectives of the fund. What are they and is there any explicit reference to investing in securities that are providing solutions to social and or environmental challenges?

Mike Fox

We have three objectives. One is to explicitly invest in companies that provide solutions to environmental and social issues. Secondly, to invest in companies that show leadership in ESG management and thirdly to provide an above market level of return over medium time periods. So absolutely, the sustainability criteria are part of our objectives and part of our prospectus.

Anna Mercer

What is the definition of sustainability applied to this fund and applied by you as well?

Mike Fox

What’s interesting for us is that the origins of this product range are in basically 1990, so when we came up with our definition of sustainability, there was no sustainable investment industry, which is very different from now when clearly there are many definitions.

For us it really simply came down to what does a company make and how it makes it so products and services, what role do they have in broader society and then also how they make those products and services and the ESG standards within the business. Our definition is consistent with many definitions in some ways, but I do think the inclusion of ESG leaders is a slightly broader, more pragmatic manifestation of some of the definitions of sustainability out there today.

Anna Mercer

And when you talk about those ESG leaders or the companies that are providing the solutions, do you provide examples of those holdings and how they're meeting that criteria?

Mike Fox

Yes we do. One thing for us is because sustainability is subjective, my views and your views can be different, is that we have to have an entirely auditable process start to finish, externally overseen. Quite often people will challenge us and say why is company X in the fund, and whilst you might not always agree with us, we need to be able to show you why we thought it was and how that was overseen.

Our clients can ask us on any company we own, and we can provide it and how it aligns. We do have publications to make that easier, where we give examples that we choose and, but that's quite favourable to us. The fun ones are the ones are where people ask us why you've got this company rather than the ones that we necessarily choose to talk about.

Anna Mercer

You’ve mentioned these case studies and the kind of publications that you do, but do you produce kind of an explicit sustainability report on the fund holdings or what they're achieving so we don't?

Mike Fox

We don’t at the moment, and this is quite an interesting topic. For us, we do equity and credit, we do regional and global and some of our funds include all of those. What we are working through at the moment is basically reliable data that spans that range of securities to make sure that whatever we put out there doesn't have so many disclaimers on it that it begins to undermine what it's actually saying.

I think that's a bit of a journey, I think there are areas we can do it quite effectively on, such as carbon and climate, where I think data is getting much better. Diversity stats, for example are pretty trivial, but freely available as well. However, at the moment that we can't find a way of getting enough data to systematically map the sustainability impacts of the films. We are of the nature that we don't want to put anything out there that might overemphasize what we do or don't do.

We will do sustainability reports in the future, but they do have to be more than marketing documents at the end of the day. We are going to say that this fund is interested in climate change carbon reduction and if we put numbers behind that they need to stand up, and at the moment, sometimes they do, and sometimes they don't.

Anna Mercer

You've mentioned that issue with the data availability and the kind of reporting on that element, and you also kind of use the term map there, I was wondering do you try and map the fund and its holdings to any kind of explicit targets or initiatives in terms of sustainability, such as the UN Sustainable Development Goals?

Mike Fox

We do, but they tend to be our structures rather than other people's. Again, these funds predated the UN Sustainable Development Goals. (SDGs), and the SDG's run out in 2030. In addition, the United Nations, for all its worthy attributes, didn't really create them from a fund manager perspective. We think we can report our funds along SDG's, but we just want to be clear that it is a reporting function, it's not the way that we pick stocks.

Ultimately, what we've developed over the years is the ability to look at security by security, the sustainable criteria of an equity or credits and decide whether it's suitable and then we let that aggregate up and through us it creates themes, it creates areas that, at a point in time, are very relevant to us, some of which we can measure and some of which we can't. We can certainly measure ones we've mentioned before, but for example, next generation Healthcare is a theme for us. We'd quite like to own some companies that will cure cancer, to measure progress in cancer treatments and report on it. You can find numbers for it, and that's not a problem, but whether they actually mean anything, is very relevant.

Where we can measure it and disclose, we do, but we always make sure that whatever we put out there actually has integrity behind it.

Anna Mercer

I've heard that when it comes to kind of measuring and disclosing a big part of that can be about company engagement and just about engagement more broadly, are there any engagement advocacy or stewardship activities undertaken for example, and if so, do you measure the outcomes of these? Do you publish them? I know you've mentioned the reporting in terms of data, but do you publish potentially how many votes you vote? Or if you voted to war against management for example?

Mike Fox

Royal London Asset Management produces a stewardship and Responsible investment report every year, which has full disclosure on voting, full disclosure on engagement exercises and the sustainable funds are a big part of that report.

We tend to do it collectively with the asset manager, because certainly when we're dealing with corporates with respect to reiteration and other engagement issues, it makes much, much more sense for us to operate as an entire asset manager than just simply for the sustainable funds.

For us, engagement and stewardship is quite different from all market funds. We tend to duck the big issues, rather than engaging with BP and Shell to make them less carbon intensive, we just don't own them. You can argue both ways, whether that's right versus engagement, but for us, engagement tends to be investment research. We do a piece of research and from those three or four issues that are unique to a company come out, we think if they could be better on it what would actually improve their scoring through our process. Whilst we do thematic engagement and voting, engagement now has kind of just become research. it's not discrete anymore, it's just part of what you would do to research an entity and the way we would measure that ultimately is investing more in a company and hopefully seeing it perform better over time.

Anna Mercer

That research, must, you know, take quite a lot of time, especially to the high level that you do it to. What resources and support are available to you? For example, do you have any external data systems or an internal research framework or a materiality framework?

Mike Fox

When we started doing this there were no third-party research providers, so we had to from day one come up with a team that could go back to source information and do it themselves and we still have that team now. I think it's a very, very strong skill to have and we tend to think that third-party research providers on ESG are much like investment bank financial recommendations, you know one will have a buy, one will have a sell and one will have a whole.

In the same way we wouldn't outsource our kind of buys and sells to investment bank, we wouldn't outsource our research to a third-party provider. We’ll read them, there’s no virtue in ignorance, but ultimately when we find something of interest, we do it ourselves and so that is an internal research capability that spans Royal London – it has environmental specialist, social specialist, corporate governance specialist, equity people credit people. I think more than any themes or any kind of structures around sustainability, I think that's what defines us, the ability to look at each individual security as a puzzle and solve it, and that’s the skill in what we do.

It has become easier to be fair, 15 years ago we were opening the mail and things like that to find information. Of course, the data out there has become more easily accessible, but the datasets in themselves don't mean anything. It's where that data came from, and then ultimately how we use it is the critical point in the research process.

Anna Mercer

You have mentioned there about social specialists and environmental specialists. Is there a responsible or investment advisory committee that kind of overseas your work or that you kind of bounce ideas off?

Mike Fox

Yes, so we have to have that because ultimately, we always subject to the question, “Well there is no right or wrong in sustainability, are you just effectively making the case to suit what you may wish to do financially?”

If we solely relied on a third-party research provider, we could say look, it's them, that's their view and you might accept it or not, you might not. Through us we always run an external Advisory committee who come from the corporate world, the academic world, the client world, and the investment world to oversee what we do. As much as it being a pass or fail, we agree or disagree, they are a group of people who just have personal experiences way beyond our own, so often we're just learning from them on issues that there is no precedent for. They do also provide reassurance to our clients that somebody, not just us and somebody that isn't renumerated around the performance of the fund, or the commerciality of the fund is making sure that that the decisions we're making that correct.

Anna Mercer

You have mentioned that you don't rely on third-party data or research for example, but is there any third-party validation of the fund’s philosophy or process outside of that External committee?

Mike Fox

We rely with people like Square Mile and consultants and anybody who wants to come in and test the process. The validation for us is that and I think there may well be other entities that cannot offer more audit type services, but for us the validation comes from other people who understand investments, that look at what we do and say it make sense.

The biggest validation for me is the External Advisory Committee, because that tells me we're making good judgments on behalf of our clients. If third-parties want to come in and rate the funds, and some people have, then they're more than welcome to do that as well.

Anna Mercer

Great, well thank you very much Mike and thank you for listening. We hope you found this video useful and informative.