Socially Responsible Investing

Sustainability Disclosure Requirements (SDR)

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Coming into effect on 31 July, the Sustainability Disclosure Requirements (SDR) represent a significant regulatory change aimed at enhancing transparency and accountability in the fund management industry.

 

Why is this necessary? Over the years, environmental and social challenges – such as climate change and wealth inequality – have become increasingly important to investors, resulting in growing demand for socially responsible products.

To illustrate the substantial increase in demand from an investment perspective, we can turn to data from the Global Sustainable Investment Alliance (GSIA), a consortium of membership-based sustainable investment organisations around the world. According to their latest biennial Investment Review[1], assets in responsible and sustainable investment markets reached $30.3 trillion worldwide in 2022 – or a 33% increase compared with the $22.8 trillion recorded in 2016, and similar trends are evident in data from other reputable sources. Despite difficult market conditions for responsible and sustainable assets over the past two years (coinciding with higher inflation and higher interest rates), the growth of these assets appears set to continue. Predictions suggest that they could surpass $40 trillion by 2030[2].

* The apparent reduction in US sustainable investment assets under management between 2020 and 2022 is explained by the adoption of revised methodology in determining what constitutes a sustainable fund.

** Data for 2030 is estimated.

To tap into this trend, in recent years companies and fund houses have been rolling out new products with a sustainable tilt, or saying that they are embracing environmental, social and governance (ESG) principles. While many of these organisations have been using growing demand to improve their business practices, others have been accused of greenwashing: the practice of making misleading environmental claims for marketing purposes, ultimately to increase profits.

To address greenwashing, the UK regulator – the Financial Conduct Authority (FCA) – has introduced the Sustainability Disclosure Requirements (SDR). The aim is to make it clearer for consumers to understand the environmental and social impacts of the products that they are buying, by setting standardised disclosure rules.

Products within the SDR’s scope may voluntarily apply one of four labels – Sustainability Focus, Sustainability Improvers, Sustainability Impact or Sustainability Mixed Goals – that accurately reflects their sustainability characteristics. Each label has its own very clear and distinct criteria, so firms need to choose carefully to ensure accurate representation. Where a label is assigned, then firms must provide various disclosures on an ongoing basis that detail the sustainability characteristics of those products. In any cases where a firm misuses a label, makes misleading disclosures and/or ignores the requirement to make the necessary disclosures, then the FCA has the authority to take enforcement action, including financial penalties and sanctions – this is the first time that the FCA has been given such extensive powers over sustainability-related claims.

The SDR should therefore take transparency a step further in guiding consumers and investors toward environmentally and socially responsible choices. By implementing a comprehensive labelling system, the SDR ensures that products labelled as ‘sustainable’ genuinely represent their advertised characteristics, in turn enhancing trust in the market, and contributing to a more meaningful and measurable impact on environmental and social outcomes.

Implementation of the SDR also impacts our Ellis Bates Socially Responsible Investment (SRI) portfolios and we are communicating with the fund managers to ensure alignment with the new guidelines. To be eligible for inclusion in our SRI portfolios, funds must adhere to stringent criteria that fit with both the SRI and investment objectives of the strategy. Since launching our first SRI portfolio in 2008, this rigorous process has been central to our approach, and we continue to uphold our commitment to socially responsible investing.

[1] Global Sustainable Investment Alliance, 2023. Global Sustainable Investment Review 2022. Retrieved from https://www.gsi-alliance.org/wp-content/uploads/2023/12/GSIA-Report-2022.pdf (Accessed: June 2024)
[2] Bloomberg, February 2024. Global ESG assets predicted to hit $40 trillion by 2030, despite challenging environment, forecasts Bloomberg Intelligence. Retrieved from https://www.bloomberg.com/company/press/global-esg-assets-predicted-to-hit-40-trillion-by-2030-despite-challenging-environment-forecasts-bloomberg-intelligence/ (Accessed: June 2024)

 

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What are the pros and cons of Socially Responsible Investing?

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Sustainable investing, or Socially Responsible Investing (SRI) is the practice of investing into companies that ‘do good’ (or, at the very least, ‘do no harm’) to the environment and the community.

These companies have sustainable business practices capable of being continued indefinitely, without causing harm to current or future generations, on the expectation that they have higher investment potential over the long term.

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What factors are considered for Socially Responsible Investing?

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We screen and choose all our funds, not just SRI portfolios, against a range of Environmental, Social and Governance (ESG) factors so you can see the impact your investments are having. If you are interested in Socially Responsible Investing, please get in touch with us:

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Global Temperatures and the Energy Gap

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Global Temperatures and the Energy Gap

The summer of 2022 will be etched in the memories of many, marking the first time in the UK’s history when temperatures reached 40°C (the UK’s longstanding temperature record makes this event quite remarkable). These conditions were not confined only to our shores; temperatures across multiple continents exceeded the norm, and NASA satellite observations revealed that Arctic and Antarctic sea ice coverage had melted to record (or near-record) lows.

In comparison, the summer of 2023 was relatively mild. The hottest day, during the September heatwave, saw the Met Office recording a high of 33.5°C in Kent[1]. Nevertheless, this warmth was mostly confined to southern England and Wales, making September unseasonably warm for those areas.

Globally, though, the average temperature was so high last year that Professor Ed Hawkins, a climate scientist at the University of Reading, had to add a deeper shade of red to his climate stripes graphic[2], which represents the average temperature each year since 1850 compared to the long-term average. The right end of the image, dominated by red bars, illustrates the potential influence of human-induced climate change.

With the high figure of 2023 being lower than that of 2022, how could this be? This is explained by the fact that, on average, temperatures surpassed the norm in eight out of 12 months in 2023[3]. Additionally, 2023 marked the first year on record that every single day surpassed pre-industrial levels by more than 1°C. Nearly half of these days exceeded 1.5°C, with some approaching 2°C[4]. These numbers may sound small, but they signify a substantial increase in accumulated heat, carrying profound implications for global ecosystems and weather patterns.

The data underscores the necessity for governments to set more ambitious climate goals. While we recognise the collective responsibility of all parts of society – governments, companies and individuals – in these efforts, it is crucial to acknowledge the role that governments play in shaping governance, policymaking and systemic change.

Governments are particularly influential in steering the transition to renewable energy. Their power to implement policies incentivising the development and deployment of renewable technologies not only benefits the environment (by reducing greenhouse gas emissions), but also enhances national energy security, ultimately reducing energy bills for households and businesses. In the UK, about 40% of electricity generation comes from renewable sources[5] (via about 1,000 solar farms[6], 1,500 operational onshore and offshore wind farms[7], and 1,500 hydropower plants[8]). A further 14% comes from nuclear power. However, the current renewable generation of 175 terawatt-hours falls short of the domestic consumption of 275 terawatt-hours a year, necessitating a scaling up of renewable farms and plants to bridge this gap.

Regardless, a 2023 study by campaign group Britain Remain[9] reveals that over 70 councils across England collectively opposed one-fifth of renewable project applications, capable of powering an estimated 4.4 million homes for a year. One significant reason for rejection is the impact on agriculture: solar/wind farms are often criticised as land-intensive, raising concerns about competition for finite land resources that could otherwise be used for food production. In a world already grappling with issues such as soil degradation and water shortages affecting agricultural productivity, energy goals must be carefully balanced with the need for sustainable food production. Another aspect contributing to opposition is the impact on the landscape, with some arguing that such farms and plants are eyesores that mar the natural beauty of the countryside.

Encouragingly, technological advancements offer promising solutions to address these concerns. Notable strides have been made in developing solar panels with improved performance and efficiency, reducing the land footprint of solar farms while maintaining substantial energy outputs. Innovation such as bifacial solar panels (capable of capturing sunlight from both sides) contribute to increased energy yields without a proportional increase in the land footprint. Similar progress in wind energy technology has led to the creation of turbines with blades made from innovative materials, enhancing efficiency and durability.

This progress in renewable energy, coupled with the growing demand for sustainable solutions, creates an attractive landscape for investment. Our SRI portfolios reflect our commitment to fostering environmentally conscious opportunities, with funds such as Ninety One Global Environment (which invests primarily in companies that are contributing to sustainable decarbonisation) and M&G Global Sustain Paris Aligned (which invests in companies that contribute to climate change goals) aligning with our values of promoting sustainability.

Sources:

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How can I invest in green pensions?

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Sustainable investing is growing ever more popular due to the impact of climate change. Financial Advisor, Gary Davies, outlines the growing popularity and availability of investing in green pension funds.

If you’d like to speak to us about green pensions, please fill out the form below:

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Investing in combatting global warming and the energy gap

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Investing in combatting global warming and the energy gap

With notable progress in renewable energy, coupled with the growing demand for sustainable solutions, this creates an attractive landscape for investment.

Our SRI (socially responsible investing) portfolios reflect our commitment to fostering environmentally conscious opportunities:

  • Sustainable decarbonisation
  • Promotion of sustainability
  • Wind & Solar innovation
  • Contribute to climate change goals

Find out more about how you can choose impactful investments options

Download our Guide to SRI here:

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What is ESG investing?

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What is ESG Investing?

ESG investing is a criteria used to screen potential investments.

  • Environmental: Assessment of the impact companies are having on the planet today and in the future.
  • Social: Assessment of the social impact companies are having on people in the world.
  • Governance: Assessment of the structure, procedures and practices that control and direct a company.

Read more about ESG Investing and how we use ESG principles to screen our Socially Responsible Investment (SRI) funds.

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How can I invest in green pensions?

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Sustainable investing is growing ever more popular due to the impact of climate change. Financial Advisor, Gary Davies, outlines the growing popularity and availability of investing in green pension funds.

Read more about Ethical Investing at Ellis Bates.

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Ethical Investing

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By Kim Holding, Portfolio Manager

The world of ethical, responsible and sustainable investing is very fast moving and becoming increasingly complex. Not a day seems to go by without a new regulation or piece of legislation being proposed or enacted, to further promote sustainable practices, and hold businesses accountable for their impact on the environment and society.

How, then, can investors successfully navigate the landscape, and make sense of the information overload?

At Ellis Bates, our Investment Team has been managing Socially Responsible Investing (SRI) portfolios since 2008, demonstrating our deep roots in this area. To keep up to date with developments and filter out funds most worthy of our clients’ investment and trust, our investment process has naturally evolved over the years, more recently with the development of our SRI Framework. This Framework is a highly detailed tool that allows us to carry out an in-depth analysis on many factors including a fund’s alignment with the latest standards, investment philosophy, experience of the management team and engagement policies, to ensure the fund really is as ‘good’ as it says it is. As a living, breathing document, the Framework has undergone many developments and refinements since its implementation, and further revisions will be necessary as the landscape continues to evolve.

Utilising our Framework has allowed us to pinpoint several funds requiring further assessment. The most effective approach to clarify this information is to engage in discussions with the management teams – our well-established relationships with these teams significantly improves our access to valuable insights, enables constructive dialogues, and keeps us informed about their strategies and decision-making processes.

By way of illustration: this summer, our Framework brought attention to a fund in our SRI portfolios that exhibited notable exposure to UK water companies. Investors are no doubt aware that these companies have faced scrutiny in recent months due to their involvement in polluting rivers with sewage, and we recognise that addressing such negative environmental impacts is of utmost importance.

From our interactions with the fund’s management team, we established their beliefs and perspectives: a combination of events including outdated infrastructure (much of which dates to the Victorian era) and population growth (thus putting increased demand on this infrastructure) have contributed to these events. This can raise questions among observers as to why infrastructure dates back several decades, when investment in the industry has doubled since privatisation in 1989[1].

One area of criticism is that directors have allowed larger pay-outs to investors than on infrastructure investment. In economics, capitalism and socialism are opposing schools of thought: when capitalism is left unchecked, this can lead to inequalities and social injustices stemming from firms’ pursuit of profit. On the other hand, an anti-profit culture can result in a lack of dynamism in an economy, while failure by directors to make investor payments could violate their legal obligations under the Companies Act (which says, among other things, that they must act in shareholders’ best interests).

When capitalism or socialism is taken to an extreme, from an economic perspective, it can become necessary to restore balance. Indeed, water companies, regulators and government are responding positively to feedback from the Industry and Regulators Committee[2] who, following an investigation, have recommended measures to tackle these concerns. One example is providing new powers to regulator Ofwat, to closely monitor investment by the industry, and to hold firms to account[3].

Meanwhile, the fund’s management team is engaging with water companies to issue ‘use of proceeds’ blue bonds, where money raised is dedicated to specific projects such as upgrading infrastructure. The team – and we – continue to monitor the situation regarding pollution, while holding what they consider to be the most impactful names within the water sector, all of which should improve water security, and deliver better environmental and social outcomes.

We are reassured by the amount of time and research that the team has clearly dedicated to understanding this issue. Further, they have experience of engaging with companies on Environmental, Social and Governance (ESG) matters, thus fostering positive change and promoting sustainability.

Is it time to build a more ethical portfolio?

As awareness and interest in ESG factors continue to grow, the trend towards responsible investing will only strengthen. Starting a portfolio and filling it with environmentally, socially and governance-minded investments doesn’t need to be difficult. To find out more, please speak to us today.

Sources
[1] Ofwat, March 2022. Investment in the water industry. Retrieved from https://www.ofwat.gov.uk/investment-in-the-water-industry/ (Accessed: August 2023)[2] UK Parliament, March 2023. Failures of regulators, water companies and Government leaving public and environment in the mire. Retrieved from https://committees.parliament.uk/committee/517/industry-and-regulators-committee/news/194330/failures-of-regulators-water-companies-and-government-leaving-public-and-environment-in-the-mire/ (Accessed: August 2023)
[3] GOV.UK, March 2023. Government supports new Ofwat powers to tackle water company dividends. Retrieved from https://www.gov.uk/government/news/government-supports-new-ofwat-powers-to-tackle-water-company-dividends (Accessed: August 2023)

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World Environment Day

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World Environment Day was created in 1972 by the UN General Assembly and is held annually on 5 June. The day encourages millions of people across the world to help protect and restore the Earth.

  • More than 400 million tonnes of plastic is produced every year
  • Only half of plastic produced is designed to be used only once
  • Less than 10 per cent of plastic is recycled
  • An estimated 19-23 million tonnes end up in lakes, rivers and seas
  • You can make green choices when it comes to your pensions & investments to help our environment

Speak to one of our Socially Responsible Investment Advisors

SRI has always been at the heart of our investment philosophy and we have a range of portfolios that focus on sustainable investment funds. To find out more about how you can invest responsibly, get in touch and speak one of our Socially Responsible Investment Advisors.

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