Fund Focus podcast: the latest on the RLP Sustainable Fund range

28 June 2019

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One year on from the launch of the RLP Sustainable Fund Range, we talk to Mike Fox, RLAM's head of sustainable investment.

Mike talks to us about how the funds have evolved, the type of investors they're attracting and what he thinks the future is for sustainable investing.

[ Katie ]

Hi, I'm Katie Eagles from the investment solutions team here at Royal London. And in this edition of Funds Focus we're talking to Mike Fox, Head of Sustainable Investment at Royal London Asset Management. It's been one year now since we launched this sustainable fund range to our pension customers and so we'll catch up with Mike on how the funds have evolved over the past year, the types of investors they’re attracting, and what he thinks the future is for sustainable investing. Mike, now for those of us who aren't familiar with the sustainable funds range can you give us a broad overview?

[ Mike ]

Yeah sure it's a range of five funds with total assets on the management of around two and a half billion pounds. The range goes from 100 percent equities to 100 percent fixed income and then basically grades in between. So, what they actually offers is that we can accommodate most income requirements. Most capital growth requirements, most risk requirements all with the same sustainable approach fund range. The overall goal of the funds is to invest in a way that the benefits society and really to help the transition to a cleaner, healthier, safer, and more inclusive society. We believe in doing this we can deliver a good rate of investment return whilst at the same time benefiting broader society.

[ Katie ]

And what is your sustainable investment process?

[ Mike ]

I think the first thing to say about the investment process is to if you like compare it to ethical. So most people's reference point is probably still ethical is the terminology that is still widely used. But  sustainable and ethical and not the same thing. And the way to differentiate is that you know ethical investing is very much about exclusion and avoidance. Sustainable investment is very much about inclusion and making positive choices. So, when we decide to invest or look at a company we look at two things. We look at the products and services of that company - do they contribute to a cleaner healthier safer more inclusive society? So you know areas like healthcare and technology would be good examples of that. But they are often companies in the portfolios that when investors see them they can intuitively understand why they're in there.

But we also look for companies that lead their industries in environmental, social and corporate governance management - ESG leaders. So a good example of that would be something like Unilever. So, Unilever makes a whole range of consumer products from pot noodles to those shower gel. A new target from the products and services perspective maybe they're not the most obvious fit for the funds. Unilever is a world leader in sustainability in understanding how it designs products, how those products are used, and how they're disposed of that it can have a huge impact on society more broadly. And we find that companies who take such responsibility seriously we think are also a good fit. So, products and services and ESG standards are the two things that we look at, but we also look at traditional financial metrics as well. So, you know we want to make sure within equities that we invest in companies that genuinely create value for shareholders. We want to make sure we invest in companies that we can buy them at a price that's attractive to own them. And also, when we talk about fixed income that we want to make sure we're getting the relevant protections and covenants that means that our investment is protected for the long term. So, the investment process really is about looking at products and services looking at environmental social governance standards integrating that very much into traditional financial analysis. And then from making differentiated investment decisions that over time will deliver long term performance.

[ Katie ] 

Great, thank you for that.  And how much have the themes the funds have focussed on, shifted over the last year? 

[ Mike ]

Very little actually. So if you look at the big themes in the funds the two areas that dominate I would suggest to this idea of a more data driven economy, this digitization of society and then also the electrification of broader society as well and many themes such as Industry 4.0 which is about using sensors and data to make old industries more efficient, artificial intelligence and cloud computing put very much into the digitization area and then energy transition and electric vehicles fit very much into electrification team. And I think it's one of the most fascinating things that we may moment is that many of the big themes are out there in society are hugely relevant for sustainable investors and we don't expect them to change materially. And they provide us a great tailwind to invest with them. We think for a very long time to come. Maybe one change that is worth noting is even though the technology element of the funds is still there it has been reduced since 12 months ago. So, we're very aware of the big broader debates about technology and society. And whilst we do think that technology has huge positives in terms of how it allows social and economic environmental progress to be made you know we have to be mindful of the fact that for sustainable funds some of the issues are worthy of consideration in determining how much we should invest in them. So, then technology is an area which is still a theme for us. But there's less exposure in the funds than there was last year. But the themes overall have remained consistent over the 12 months.

[ Katie ]

So, although the themes themselves never changed have you seen any change in the types of people were investing funds?

[ Mike ]

Yes. Simply put a very big change. So, I started in managing these funds in 2003. It was one fund then -  sustainable leaders and really back in 2003 there were very few people who thought sustainability, environmental and social issues had any relevance in investment contacts and really the investor base back then was widely considered to be very dyed in the wool old school type ethical investor. But beyond that the funds really didn't get much traction. This all changed about two or three years ago and two things change. One is that the concepts of sustainability and society has become much more widely accepted. Many consumer choices now going to go beyond what is the basic utility of a product. What does that actually do to the environmental and social context within which that is produce? And investing is one of the most powerful ways that we consume. And so what we've seen is that broader acceptance of sustainability starts to really change the people who are investing in these funds and now they have become to some extent very mainstream. Many of the investors that we have in the funds you know are just people who consume in a relatively ordinary way but want to know when they make purchases that either the companies they purchase from or the private they're buying from has this sustainable element to it. And then the second point as well is that the investment performance point so sustainability is becoming more accepted as a style of investment. And that's simply put to say that actually if you're not as won over by the idea of using capital in a socially positive way, the past performance of a number of the sustainable funds including ours illustrates that this is just a great way to invest. So, what we've tended to find is that we've gone from a situation where it was a very narrow population of people who would consider this product relevant to actually the vast majority of investors starting to find that sustainable investment is a good solution for them and that's great. I mean we've always believed that this is a start of an investment that is for the mainstream that is not niche. That actually in 10 years’ time we'll actually look back and think why wasn't all investment sustainable? And that is a change that's just happening as we speak, and it is very noticeable.

[ Katie ]

Now, one of the questions that has come up since we’ve launched the sustainable funds for our pensions customers, is why we invest in companies that are linked to fossil fuels such as our SSE. Mike, how can we justify our investment here?

[ Mike ]

This is a good question and a very fair question. So to give context, what we're talking about here is really about energy transition which is all about how do we transition from high carbon forms of fuel to renewables. You know it's out here today. The reality is that none of us or very few of us would have made it in the office today and without commodities carbon based fuels that we were a big part of but so pragmatically we've got a starting point that we have to accept and then understand how we can evolve from that. So, when we come to think about that from a products and services perspective, we're really interested in companies who are leading that charge to moving from carbon based fuels to renewables. And there is a mixed outcome when we look at that lens. So, we looked at oil majors - Exxon Mobil, Shell would be two examples. The amounts of their businesses and the amount of their investment that's going into renewables is tiny vs. the amount that's going into oil and gas. If you look at a company like Scottish and Southern Energy, SSE, SSE is the UK largest developer of wind power. 85 percent of their business, including the networks that they manage which link wind farms to the broader grid so we can access our energy, is renewables positive, it’s Carbon Transition positive. They do also have some thermal generation, so that's gas and coal which is a relatively small part of the business. With respect to coal we expect to exit that over time.

So in the way that we look at the world of businesses 85 percent positive and leading the transition to a lower carbon future is very suitable and as pragmatists we accept that the some of the coal generation and gas generation we will prefer it not to be there but in the context of the large proportion of the business that comes from renewables we think it's an acceptable decision. But just to be clear on this point we do not invest in any companies that extract oil and gas on the ground. We do not invest in any mining companies. So, we think that those companies do not meet the criteria for energy transition. We just have a very specific view on SSE that we think we should reward that company with our investment because of their stated business strategy and business makes. It is a great illustration of the broader point that every company needs to be looked at individually. Sustainable Investing is not a box ticking approach and there are no companies that are perfect out there and we have to make principled but also pragmatic judgments about what we think is right and wrong. Supported by an external advisory committee that always oversee that the decisions we make are in the spirit and the objectives of the funds that we manage.

[ Katie ]

Your team works very closely with the responsible investment team at Royal London Asset Management. How is that team influencing positive change over the last twelve months?

[ Mike ]

The two areas that they've really been working hard on are remuneration and diversity. I mean under the heading of corporate governance and an interestingly under energy transition as well so we take the corporate governance aspects, pay remains - an interesting topic for responsible investors like ourselves. Actually, in the UK corporate governance is really high standard. You wouldn't necessarily see that we read the paper every day but when we look at how we vote it's still the minority of companies where we disagree with the remuneration structures of the companies that we own. So, we are constantly talking to those companies, engaging with those companies to ensure we can get to a position where we think remuneration structures are acceptable. Diversity is a big issue for us as well and we're becoming more pronounced in the way that we invest where we don't think there is appropriate diversity on boards. So, this is improving but slowly and we still find too many boards out there, company boards that 's there the construction of them just simply doesn't reflect the nature of their businesses and in particular you can often find consumer facing businesses where the diversity is lacking. That’s quite stark. You know obviously consumer facing businesses  elements of the population and we think boards should reflect that. So diversity is a big thing and then energy transition. You know the responsible investment team look across the whole of Royal London and its holdings and we really want to understand how every company we invest in can help this transition to a lower carbon future and that's involved with meeting a number of companies from National Grid, Severn Trent and SSE that we talked about to meet people at the senior level those of those companies and really understand what they are doing to support energy transition.

[ Katie ]

Mike, why do you believe in integrating ESG into the investment process?

[ Mike ]

I think there's two reasons: one is I truly believe it delivers a better investment outcome and I think really when you think about it, why would an environmentally poor, socially responsible, badly given company deliver a good investment outcome? You know I think it's a basic point of common sense and the reality is it doesn't. So if we hardwire and truly inscribe ESG into our investment thinking,  we think we are going to make better investment decisions over time which in the end for investors accrues to better investment performance.

And the second reason is I also truly believe that capital and investment can and should be used as a force for positive social change. Individual investors have huge influence in terms of determining where they give their money to, the types of funds they invest in. Who then determine which companies to support. And then the example of the sustainable funds that results in us allocating our investors money to companies that we do think are helping this transition to a cleaner, healthier, safer,  more inclusive society and avoiding the counter examples of those and we think over time that will have a very defined and positive impact more broadly on society. So, the two reasons for me are one the investment performance into the capital is being used in a socially positive way.

[ Katie ]  

Now, finally, you did touch on this earlier. What do you think the future is for sustainable investing? Is it becoming more mainstream?

[ Mike ]

So this is again an interesting question and that the numbers that we can get access to sometimes the definitions are not as clear as we would like, but the strong suggestion is that the amount of money that's invested in a sustainable way is still of the order of only 2 percent of the total amount that's invested in markets more generally.

So we think we're still at the very, very, early stages of sustainable investing even though it is growing rapidly. We still feel that there is a big proportion of the other 98 percent of investors out there that are currently not getting their values and beliefs embedded in their investments in their pensions that Sustainable Investing is a natural home for. So, our expectation is if that number is 2 percent of total assets now there's no reason over time that could become 10 percent of assets and maybe before I retire maybe, the majority of our assets. So I still think that we're in the very, very early stages of sustainable investment as an area to invest them which is tremendously exciting. I think over time I think it will become interesting how future generations will look at how we perceive sustainability and its relationship with finance and investments today. I think for most of my career the question has been why would you invest in sustainable funds whereas now is why wouldn't you? And I think future generations are likely to question why we ever thought it was an odd thing to do to consider environmental, social and corporate governance issues in the investment decision making. So, in summary I think we're really early on in this and I think it's a really exciting time to be involved in sustainable investing and you know thus far motivation as we go forward.


[ Katie ]


Thank you so much Mike and thanks for listening.

 

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