Episode 3 of the Four Word Thinking podcast “Tour of Edinburgh’s Responsible Capital” is now live!
Speaking with us on this episode we have two Edinburgh based investment experts who manage billions of pounds in pension and investment funds.
David Hickey, is a Portfolio Manager and Responsible Investment Lead for the Lothian Pension fund, which is the second-largest local government pension scheme in Scotland with 84,000 members. Joining us and David is Kate Fox, Fund Manager for Baillie Gifford’s Positive Change fund, which features in Waverton’s Responsible Futures portfolios.
We’ve brought David and Kate together to discuss some of the latest trends and challenges facing responsible investors and their own particular approaches to investing positively. The Four Words we are thinking for this episode are:
Our speakers in this episode, David and Kate are subject market experts when it comes to responsible investing. Those of us who are less well versed in this field might benefit from an explanation of some of the matters they discuss. Engagement and clear communication are important to us at FourWord Thinking and Waverton Wealth Planning, so we have provided a description of some key “responsible investment” terms below.
More than Four Words Glossary
|ESG||An abbreviation that stands for Environmental, Social and Governance, three factors used to consider the quality of companies selected for an investment portfolio.
· The E considers the impact the company’s products, services and operations have on the natural environment.
· S relates to the human aspect of the company’s activities and products – does this affect people (customers, workers, the communities in which it operates, society as a whole) negatively or positively.
· Governance is about how a company is structured, managed and owned, as well as how it distributes its profits.
|Stakeholders||A person with an interest or concern in something – for a business this tends to be staff, shareholders, customers and the communities in which their operations, products and services exist.|
|Fiduciary responsibility||This relates to the duty that the Trustees and investment managers of a pension scheme have to the scheme members, whose pension rights they are trusted to safeguard.|
|Divestment||This simply means selling an asset – such as company shares or a property – the opposite of investment. Many climate change campaigners believe in divestment of the shares of companies that extract fossil fuels such as gas and oil.|
|Supply-chain management||This relates to a company having oversight of the ESG impact of all its activities, all the stages that its goods and services pass through. As an example, the supply chain of a jar of instant coffee includes the treatment of workers, land and nature at the plantation, how it is transported and how it is packaged and marketed.
David refers to a recent supply chain scandal, which was the one that made the news in the fashion industry and the poor conditions in which people work in clothes factories overseas.
|ESG at stock level||Using ESG factors to determine whether or not you purchase shares (stocks) in a particular company.|
|Cost of capital||This relates to the return an investor expects in order to buy shares or lend money to a company.|
|Short-term “multiples”||A multiple is used to determine the value of a company and compare it to other businesses, typically based on profit, cash flows etcetera.|
|Quality factors/ quality growth investing||Quality investors aim to buy “good prospect” companies, not just “cheap” companies. It focuses on determining whether the company’s share price is fair value, based on the company’s future potential.|
|Engage/ engagement||In an investment context, this means the person who own’s shares in a company aims to bear influence on the company’s management and decision makers. This may be by voting, private and public communications and campaigning.|
|Quant-based/ quant funds||These terms describe the selection of stocks based on maths, statistics and computerised analysis.|
|Equities||The common term in the investment industry for company shares.|
|Cost of capital, at the margin||This means how much of a return to the investor a company needs to provide in order to attract one more £/$ of investment (the next layer of funding that the company requires).|
|Non-Paris-aligned companies||Businesses that have not adjusted their activities with a view to meeting climate change targets set at the United Nations Conference of Parties that took place in Paris in 2015.|
|UN SDGs||United Nations Sustainable Development Goals – 17 goals signed up to by all member states of the UN in order to shape government policy and funding – these cover wide-ranging issues that affect people and planet – such as poverty, equality, right to education, climate change and fair and sustainable economic growth.|
|Intentionality and additionality||Intentionality is an investor’s intention to have a positive social or environmental impact through their investments. Additionality is where an investment in a business generates an activity that has a positive impact socially or environmentally that wouldn’t have happened if the investment had not been made.|
|Impact-washing||Impact investments are designed to generate a positive and measurable environmental or social outcome. Impact washing is where, for marketing purposes, the intention to have such a positive income is over-exaggerated or falls in some way short of the whole truth.|
|Investing passively||Passive investments track stock market indices, such as the FTSE100, creating a collection of companies or other assets that simply reflect what is held within that index. It is the opposite to active investment, whereby the fund or portfolio manager selects companies individually based on their own views and analysis of how they expect that company to perform.|
|UK Asset Owners RI roundtable||A collaborative, informal grouping of UK Asset Owners who come together to discuss matters and ideas relating to responsible investing.|
|Ceres Report||Ceres is a US-based non-profit organization founded by investors and environmentalists in response to the Exxon Valdes oil spill disaster in 1989. They have produced a number of reports on how business and finance can help drive environmental and social change. https://www.ceres.org/about-us|
|Head of EMEA||EMEA is an abbreviation for Europe, Middle East and Africa and the Head of EMEA at BlackRock will oversee all strategy and operations across those regions. US company BlackRock is the world’s largest investment company/ asset manager.|
|Climate Action 100+||This organization is an investor initiative launched in 2017 to ensure that the world’s largest greenhouse gas emitters take necessary action on climate change. The group includes investors with significant assets under management, such as BlackRock.|
|Larry’s letter||This refers to a letter written annually by BlackRock CEO, Larry Fink. His 2020 letter broke new ground as it announced a sweeping new set of policies that aim to put climate change and sustainability at the centre of BlackRock’s business model.|