Investors no longer care just about making money

In July this year British luxury brand Burberry found itself in a public relations storm. A statement in its annual report revealed that it had burned £28 million (R528 million) worth of unwanted products in the last year.

In fact, the company had disposed of stock worth more than £90 million (R1.7 billion) in a five-year period. It justified it as an effort to protect the value of its brand.

It is a practice that is widespread in the high-end fashion industry. Clothing and other items are burned to stop them from being stolen or sold at a large discount, which would hurt a brand’s pricing power.

The resulting outcry, however, caused the company to re-think what it was doing. Last month it announced that it would no longer destroy unsaleable products. It said it was doing so as part of its drive to become a more responsible and sustainable business.

This is an interesting anecdote not because it is unusual, but because it is the sort of thing that is becoming increasingly commonplace. Companies are under growing pressure to demonstrate that they are not just running profitable businesses, but ones that are socially and environmentally responsible.

Investments are no different

This has become an important theme in the asset management industry as well. Just as consumers are looking for products and brands that align with their values, they want fund managers who do the same.

“Consumers are turning towards more sustainable offerings in every industry,” says Hortense Bioy, the director of passive funds and sustainability research in Europe for Morningstar. “Investments are no different. More and more investors are caring not only about how much money they make, but how companies are making that money for them.”

An individual who recycles, buys organic food and makes regular contributions to charity is also likely to want to invest with a company that takes environmental, social and governance (ESG) factors into account when deciding how to allocate money.

“Sustainable investing used to be a niche area of the market, but it is going mainstream,” Bioy says.

Asset managers are reacting to this shift. For example, many local firms are signatories to the United Nations-supported Principles for Responsible Investment.

However, investors are increasingly wanting to know what that means in practice. How do fund managers ensure that they are investing in sustainable companies, and how do they respond when a business they are invested in behaves in a way that runs contrary to good ESG principles?

Proxy voting

One area where fund managers can demonstrate clearly how they are taking their roles seriously is by how they vote at company AGMs.

“Investors are now asking asset managers to be better stewards of their capital,” says Bioy. “In terms of proxy voting, they should be more transparent about how they use the tools at their disposal to make a difference.”

In South Africa, for instance, the Old Mutual Investment Group makes details available on its website for every single vote it makes immediately after every AGM it attends.

Having transparency on this is important for two reasons. The first is that it shows investors exactly how firms are approaching their responsibilities. Secondly, it allows investors to hold their fund managers to account if they believe they are not acting in their best interests.

Bioy believes disclosures should go beyond just information on voting and include some detail about where fund managers have engaged with companies in which they are invested on ESG issues.

“When asset managers speak to the companies, to top management or the board, it would be good to know how they engaged, on what, and what progress they made,” she says. “Investors should know what impact they are having, because this is about protecting their long-term wealth.”

What about passive?

This raises an interesting question with regards to index funds. Can passive managers have the same influence as active managers in this space, since they have to continue to hold companies in an index, regardless of how those companies behave?

Bioy believes that index funds are increasingly appreciating that they can, and should, be more involved.

“Passive managers are increasingly taking an active role in monitoring companies,” she says. “They realise that, with the rise of passive, the responsibility that they have has grown.”

Firms offering index-tracking products are increasingly taking their voting responsibilities seriously, and building bigger teams to manage engagement.

“Active managers have a pool of analysts who speak to companies and can raise these issues,” says Bioy. “Passive managers obviously don’t have any analysts, so they have to have a stronger strategic team and many of them are increasing their workforce when it comes to stewardship practices. For instance, BlackRock plans to have a team of 60 within the next three years.”

In fact, there is growing recognition among index fund managers that it is even more important for them to find ways of having a positive influence because they don’t have the option of divesting. If a company is in the index, they have to hold it. It is therefore to their benefit to try to improve the behaviour of those businesses whose shares they hold.

“They are, by nature, long-term investors,” says Bioy. “So they have to work with companies on these issues.”

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