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Environmental, Social & Governance

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Over the past few decades, there has been a growing interest and awareness in investing in companies that take into account environmental, social and governance (ESG) factors.

This type of investing – also known as sustainable, responsible or impact investing – aims to generate both financial returns and positive social and environmental impacts.

Sustainable investment funds

The origins of ESG investing can be traced back to the 1960s, but it was in the 1970s that the environmental movement gained momentum, with investors increasingly calling on companies to address issues such as pollution and resource depletion. And in the 1990s, corporate governance came into the spotlight following a series of high-profile corporate scandals.

ESG investing has its roots in the field of responsible investing (RI), which emerged as a response to growing concerns about the negative social and environmental impacts of businesses. RI investing initially focused on screening out companies with poor ESG records from investment portfolios.

Corporate behaviour

Over time, RI evolved into a more proactive approach that seeks to engage with companies on issues related to their ESG performance and influence corporate behaviour for positive change. This is often referred to as ‘active ownership’ or ‘impact investing’.

Today, ESG investing is a mainstream investment strategy used by institutional investors and individual investors alike. In fact, one in six investor respondents to a global responsible investing survey are committed to aligning their portfolios to net zero, with a further 42% intending to align their investment portfolios to net zero before 2050[1].

Responsible investments

While debate continues about whether doing well (financially) and doing good (morally) need not be mutually exclusive, the survey finds that more than two-thirds (69%) of respondents with exposure to responsible investments are satisfied or very satisfied with their returns to date.

Increasingly, investors are also reflecting more on what it means to be ‘responsible’. Specifically, many are actively considering what impact their investment approach can have on society and the environment. The survey identified one of the main reasons for including responsible investments in portfolios is the perception that they will lead to better risk adjusted returns when compared to ‘traditional’ investments.

Personal values

Investors’ concerns around major ESG issues continue to rise, and many are in the process of addressing at least some of these in their investment strategies. For some, it’s simply a matter of aligning their investments with their personal values.

Others believe that companies that manage ESG risks well are likely to be more financially successful over the long term. And still others see ESG investing as a way to generate positive social and environmental impacts.

How can you mix in ESG into your portfolio?

Climate change, demographics, biodiversity and the need for social justice are at the top of the agenda for many investors. The world of investment is catching up. An increasing number of funds now boast of their ESG credentials. If you would like to discuss how this could form part of your portfolio, please contact one of our ESG investment advisors for more information.

Important information: The value of your investments can go down as well as up and you may get back less than you invested.

Source data: [1] Aon’s Global Perspectives on Responsible Investing Report January 2022.

Asset Allocation

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What is asset allocation and diversification?

Asset allocation involves diversifying your investments among different assets, such as equities, bonds, property and cash. Asset allocation may change depending on what works for you based on your financial goals and your ability to tolerate risk.

  • Cash: Cash equivalents and other forms of money can be easily accessed at any time.
  • Equities: Purchasing shares on the stock market, typically traded on the Stock Exchange.
  • Bonds: A fixed-income product representing a loan made by an investor, typically corporate or governmental, for a fixed period.
  • Property: Buying properties intending to make money e.g. rental income or selling a property.

When building our portfolios, we consider all the economic and technical market conditions that influence our exposures to the main asset classes of Ellis equities, bonds, property and cash.

We screen and choose all our funds, not just our Socially Responsible Investment portfolios, against a range of Environmental, Social and Governance (ESG) factors so you can see the impact your investments are having.

Read more on our screening process for sustainable investment funds.

COP27

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By Kim Holding, Portfolio Manager

On 6 November, the 27th Conference of the Parties (the name given to the United Nations’ annual climate change conferences) began. Hosted this year by Egypt, COP is an important platform for nations to discuss and reach consensus on how to protect the world in terms of environmental issues. This year’s summit is expected to be a crucial point in the fight against climate change, as it seeks renewed solidarity between countries to deliver on their previously agreed pledges. Further, due to the scale of its potential impact, climate change takes a global effort so coordinated action is crucial.

Environmental issues have been at the centre of society’s concerns since the 1980s following disasters such as Chernobyl and the Exxon Valdez oil spill. In more recent years, climate change has been rising up public agendas. Further pressure to take action came in 2021 when the Intergovernmental Panel on Climate Change (IPCC) reported that unsustainable human behaviours (such as burning fossil fuels) have caused global temperatures to increase by 1.2°C since the 1850s, which is worryingly close to the globally agreed target of 1.5°C. According to the IPCC, this rise has damaged our planet in unprecedented ways which is, in turn, disrupting food and fresh water supplies, significantly impacting on our health and wellbeing, and putting life (both on land and at sea) at risk; and, further, that some of these effects are ‘irreversible’. Temperatures are expected to continue to rise, unless those unsustainable behaviours are addressed and greenhouse gas emissions are significantly reduced.

That said, temperature rises are not uniform across the globe, with some locations warming faster than others. Scientific research indicates that several of the world’s developing regions are contributing less to climate change, yet they are more vulnerable to its impacts, and in this regard they will continue to face much greater risks in the years ahead. One of the most widely publicised examples of 2022 is Pakistan which, following torrential monsoon rains over the summer, experienced the most severe flooding in its modern history, washing away villages and affecting millions of people; yet the country contributes less than 1% of the global carbon footprint. Another example is Africa, where large parts of Ethiopia, north-eastern Kenya and Somalia are currently facing their worst droughts for over four decades, yet the continent accounts for only 3-4% of global greenhouse gases. In contrast, approximately a quarter of emissions come from China, followed by about 12% from the US.

This non-uniformity of temperature rises is expected to be a key focal point at COP27 where world leaders, some of the world’s most influential businesses, environmental and faith groups, policymakers and think tanks are in attendance. While China, among other high-emitting countries, will not be at the summit, they – along with the US and other rich nations – are being urged to increase their financial aid to poorer countries. In doing so, this will allow the latter to deal with the impacts of climate change – for example, to establish green energy systems (to cut their own greenhouse gas emissions) and to improve their infrastructure (so they may adapt to hotter conditions).

This all comes at a time, though, when Russia’s invasion of Ukraine is putting increased economic strains on developed countries. That said, according to the International Monetary Fund (IMF) in its October assessment of the world economy, a timely and credible green transition is not only critical for our planet’s future but will also help macroeconomic stability, since the relinquishment by nations of their reliance on Russia’s fossil fuels will enable a quick transition to clean energy, simultaneously putting them more in control of their own destiny with regard to energy prices. Thus, COP27 could represent a historic turning point in the global energy crisis and in the fight against climate change.

Companies demonstrating poor practices – whether they are damaging to the environment, have poor human rights records, or are poorly managed – are more likely to fail and won’t be around in years to come, so from an investment perspective, diligent investors simply will not look to invest. For this reason, we incorporate environmental, social and governance (ESG) considerations across all our portfolios, and SRI has always formed a fundamental part of our investment process. Our SRI portfolios provide our clients with a more targeted approach in tackling the world’s challenges, and every fund we hold must demonstrate that a socially responsible investment culture is intrinsic to their approach.

For more information on our SRI portfolios, visit our Socially Responsible Investing page at https://www.ellisbates.com/socially-responsible-investing/.

Investments with Ellis Bates

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We put you, and what you want your money to achieve, at the very heart of everything we do. The Ellis Bates advantage for you is that our expert Investment team are in-house and work hand in hand with your Financial Adviser on a daily basis.

Advantages & Disadvantages of ISAs

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ISAs are a type of savings plan where you can pay in lump sums and/or regular contributions. There are both advantages and disadvantages to having an ISA.

Types of ISA

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In this session we talk about Individual Savings Accounts (ISAs) and how they encourage saving and investing in a tax efficient way.

What is an ISA?

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Individual Savings Accounts (ISAs) aim to encourage UK residents to plan for their financial future by saving and investing in a tax efficient way.

What is a Cash ISA?

A cash ISA works mainly like a traditional savings account. You can open a cash ISA if you are a UK resident aged 16 or over and it allows you to save money and pays you interest. However, when you hold a cash ISA you do not pay any tax on interest you earn. With a bank or building society account you pay income tax on earnings exceeding £1,000.

Why open a Cash ISA?

Paying into a Cash ISA is often seen as the safest option as your savings aren’t subject to the ups and downs of the investment markets. You typically get an income and easy access to your money. However, an important factor to consider is the effect of inflation on your savings over time. With interest rates being so very low, the purchasing power of your money in real terms will decline over time.

What is a Stocks and Shares ISA?

With a Stocks and Shares ISA, your money is invested in assets such as shares, bonds, property and commodities. As the investment is tax privileged no tax is applied on capital gains you make or income such as interest and dividends you earn. You can keep everything you earn from your investment after all management charges.

You can pay into a stocks and shares ISA if you are a UK resident aged 18 or over.

What are the risks of a Stocks and Shares ISA?

Holding a Stocks and Shares ISA does present some risk since there is no guaranteed return and the value of your investment could go down. However, it also gives you the chance to earn higher returns than you could expect from cash savings.

One way to mitigate your risk is by remaining invested over the long term as this typically helps you smooth out the ups and downs of the market and gives your money time to benefit from the power of compounding.

What is a Lifetime ISA?

Paying into a lifetime ISA allows you to save for your first home or your retirement and you don’t have to pay any tax on income you receive, nor capital gains tax. With this type of ISA, you will receive a 25% uplift on any amount you put in, up to a maximum uplift of £1,000 per year. This bonus is given every month and you’ll then receive interest or potential investment growth arising.

Opting for a lifetime ISA means you’ll hold cash or investments or a combination of both.

Lifetime ISAs come with many rules, for example:

  • You must be at least 18 years of age but under 40 to start a lifetime ISA.
  • The maximum you can put in each year is £4,000.
  • You can contribute until your 50th
  • If you intend to purchase a house you must be a first-time buyer, meaning you have never owned a property in the UK, and the house you wish to buy must cost £450,000 or less.

What is a Junior ISA?

A Junior ISA allows you to give your children a head start in life. You can open a Junior ISA for your child at any time as long as they are under 18, live in the UK and don’t already have a child trust fund. The amount you can put into your child’s Junior ISA each tax year is limited to £9,000.

When looking to open a Junior ISA you can choose to pay into a Junior Cash ISA, a Junior Stocks and Shares ISA, or both, as long you don’t go over your child’s annual allowance.

As with any investment, it is wise to get professional advice to ensure your investment strategy is in line with your personal risk tolerance and that the type of investment is appropriate to meet your personal needs and objectives.

Economic Outlook

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With Policy changes, volatility and unpredictability the new norm it appears at times, a different approach is needed towards your finances and investment strategy.

Ellis Bates continue to emphasise the foundations for dealing with the current conditions lie in a well-diversified, global approach to assets that have long term potential to weather the immediate storms and deliver returns over the longer term.

For more information please visit our latest market insights “Growing Pains?”

Rising Inflation

Bank of England tries to rein in inflation, which has reached its highest value since 1981, almost five times the central bank’s target. (1)

Falling Value of the £

The pound has fallen to a record low against the dollar as markets react to the UK’s biggest tax cuts in 50 years. (2)

Global Stock Market Declines

It’s hard to find much good news in relation to Global Markets, with investors remaining worried about high inflation and low growth. (3)

Sources
[1] https://www.bloomberg.com/news/articles/2022-09-26/understanding-the-british-pound-s-sudden-crash-quicktake
[2] www.bbc.co.uk
[3] https://russellinvestments.com/uk/blog/inflation-recession-earnings-mwir

Diversification Within Investments

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This session looks at how the strategy of diversification among investments can be used to reduce risk when investing.

Growing Pains?

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The UK’s new Chancellor Kwasi Kwarteng unveiled “The Growth Plan 2022” which marks a step change in government policy, both financially and ideologically. The view of the new government is summarised by the assertion that “Economic growth is the government’s central mission” and to achieve this “the government must cut taxes, streamline the public sector, and liberate the private sector.”

As always, we disregard the political or social biases with our comments and focus on the reality of facts, or importantly, the facts so far. As the chancellor noted when challenged on the financial prudence of their plan, the new regime had been in place 19 days when it was issued and there will be additional measures in the future. Those doubting the priorities of the government and where these measures will be implemented, however, need only to focus on the highlighted quotes from the mini-budget and then consider the likely economic implications.

Currency markets have been in focus as sterling initially reacted negatively to the news, with fears that the higher-than-expected levels of borrowing would cause sustained higher inflation and, in turn, higher interest rates from the Bank of England which would have significant implications on the cost of government financing at a time when this already stands at historical highs.

However, part of the uncertainty may be due to lack of detail on how the stimulus package would be financed which provides additional risk in market pricing – back to the relevance of the facts so far, and the likelihood of further communications within the theme of the government’s chosen central mission. A Conservative government that has just taken a very open and public step to the right will be acutely aware of the financial markets’ need for information and aversion to uncertainty, so we must assume a pro-business regime will adopt an operating framework to match.

What next? Initially, more uncertainty, particularly as the government and Bank of England (BoE) establish an equilibrium on fiscal stimulus and monetary restraint to break the cycle of higher inflation and higher interest rates. For growth to reach the government’s stated objective of 2.5% that will need to happen sooner rather than later, and more than likely after an almost inevitable initial recessionary period. The focus on the private sector should, in theory, be positive for businesses as the government has identified them as the solution to remedying the current economic problems. However, this is clearly a significant risk at a time when government finances are already stretched, and the macroeconomic environment is as uncertain at any point since the global financial crisis in 2007-08.

At our client webinars we have emphasised the likelihood of heightened volatility for a number of years and the implications for financial markets over the short, medium and long term. The short-term risks for UK-based investments have certainly increased with the announcements on Friday and what may be perceived as bold in some quarters has equally been dismissed as reckless in others. While clearly our portfolios are not immune to the prevailing negative market environment, we continue to emphasise the foundations for dealing with the current conditions lie in a well-diversified, global approach to assets that have long-term potential to weather the immediate storms and deliver returns over the longer term. Risks are clearly elevated at the moment and the government will need to provide more clarity on how the stimulus will be accounted for to soothe the nerves of investors.