The basic premise of responsible investment is that industries or companies that perform no social function are unsustainable. They impose costs on society and ultimately, the expectation is that such activity will simply be regulated out of existence.
With that in mind, what is the social role of investing I hear you ask? Well, without wishing to get too profound, as active investors we have to provide investment returns by effectively allocating our clients’ capital. And if we do a good job, this capital allocation should in turn benefit the overall economy.
Now, passive investing can achieve the former (at apparently lower costs… sometimes… e.g. ‘the truth about trackers’). But is it as effective in achieving the latter? Bear in mind that passive investing is a backward-looking way of allocating capital, and is also typically based on a shorter time horizon. Individually we may benefit from cheaper passive investment strategies, but what of the impact of passives on the efficiency of the overall economic system and our economic welfare?
Backward-looking and short-term. You won’t hear many passive ESG product providers describe themselves as such, but that is the selling point on which their products are constructed!
Our approach to investing in our global sustainable strategy is the complete opposite: active, bottom-up, mid-cap focused, benchmark agnostic. And we allocate capital to sustainability improvers, not just the sustainability ‘usual suspects’ or the prettiest in an ugly parade. Investing sustainably implicitly assumes a longer-term perspective which is why we are willing to selectively invest in immature innovators whose growth prospects are underpinned by long-term sustainability trends.
Similarly, for dark-green ethical funds, to provide clients with both the breadth of negative screens and the investment returns they seek, these funds have to be actively managed.
And once invested, we take our stewardship responsibilities very seriously. We regularly meet with management teams, we are willing to challenge them (not least on strategy and ESG) and if we need to, we can sell.
While passive owners can be active owners in proxy voting – the switch to passive investing has increased the concentration of ownership and voting rights – it’s impossible for them to be as effective as active strategies in holding corporates to account: they can’t sell!
That’s why, both practically and philosophically, we believe that to do responsible investing properly, it has to be in an active fashion.
Source: Kames Capital, as at the end of November 2017