SRI: a responsible approach

IROs and senior management teams must woo investors interested in socially responsible investment (SRI), or run the risk that ethical fund managers will sell their shares. That’s the warning from Sue Round, whose views have authority because of her experience.

Round has managed the Ecclesiastical Amity UK Fund since its launch in March 1988. She recently sold its holding in Statoil, the Norway-based oil group that caught the attention of UK equities investors because of its business in the North Sea.

When you sold Statoil, how did the work with the SRI team proceed?

When we make an investment in a company, we continue to monitor and engage with the firm from both a financial and non-financial perspective.

When the SRI team became aware of the change in direction within Statoil, it undertook a review, which included meeting the management in Oslo.

The shift ‒ moving away from the North Sea to the Artic, Greenland, Canada’s tar sands and difficult regimes such as Angola, Libya and Iran ‒ by the company led the SRI team to recommend a divestment.
 
What facts and figures have companies typically provided to convince the SRI team that their businesses make a positive contribution to society and the environment?

There has been a seismic shift in the way companies communicate CSR to investors over the last decade. Companies now produce a plethora of statistics on environmental, social and governance (ESG) factors that affect the business. The emphasis on which data sets are important will depend on which risks a company is more exposed to.

For example, resource companies will have a larger environmental footprint to manage, while companies in the retail sector will have to manage a robust supply chain.

The role of SRI analysts is to analyze the data and make a judgment on how well companies are incorporating ESG into their business operations. Companies that are taking the lead on ESG are more likely to deliver long-term sustainable returns.

Is a positive contribution to society and the environment your only criterion as a socially responsible investor?

No. The companies held in the Amity Funds have to pass both negative and positive screens. The former excludes companies that are materially involved in gambling, tobacco, alcohol, pornography and armaments.

The latter is built around ESG pillars. For example, we have healthcare as one of our positive screens, where companies such as Oxford Instruments, GlaxoSmithKline, Dechra and Genus score highly.

We look to invest in companies that are improving access to medicines and affordable healthcare. Halma is involved in producing environmental safety equipment. As for Centrica and BG, these companies are taking the lead on how they manage their impact on the environment.

How else can IROs convince you to invest?

We prefer to buy robust plays on sustainability that are investing in research and technology, and themes we have supported include the feeding of a growing population, so I own Yara International, a fertilizer, crop nutrition and agricultural services business.

Another theme is the greening of marine engineering, so the Amity International Fund owns Sembcorp Marine, which builds, repairs and converts ships.

Does the SRI team exclude companies that have material involvements in child labor?

Yes, this is covered under our positive screening process. We look for companies that adopt best practices in relation to adult and child labor.

A good example of this is when we were looking to invest in Cadbury (when it was listed in the UK). We had concerns over the use of child labor in West Africa on cocoa farms, so we conducted a thorough investigation, which included meetings with the company, to ensure we were satisfied.

What have you looked for when deciding how to vote about executive pay?

Factors that might contribute to a vote against remuneration include performance criteria below the market’s consensus, criteria wholly linked to the growth of the share price, factors generally outside a director’s control, such as movements in commodity prices, and long-term incentive schemes that reward directors too much for median performance.

We look at whether companies have disclosed information adequately, the particular performance conditions attached and the scope for excess: in general, annual and long-term awards that in aggregate are higher than 300 percent of salary every year make us assess the excess again.

How can shareholders and policy makers make a difference?

Investors must inspect ownership more rigorously, and they should be putting more questions to companies when pay is not aligned with the interests of shareholders in the delivery of value.