Socially responsible investing was once a fringe movement. In the past two decades however, the concept of responsible investment, or ESG investing, has grown significantly. Today it is a mainstream strategy within the professional asset management world. Globally more than US$22 trillion, or a quarter of professionally managed assets, are held within responsible investment strategies.1 Yet the landscape of sustainable investment is diverse.
Our approach to company engagement promotes responsible ESG practices as a cornerstone for the long-term financial health of the businesses in which we invest our clients’ money. As we promote good business practices in the companies in which we invest, we in turn offer our clients the opportunity to benefit from the potential share price increases that improved ESG ratings and outcomes can provide. As such our investment processes fully align ESG considerations with active ownership.
According to the biennial Global Sustainable Investment Review, the most popular form of responsible investment, by assets under management, is negative screening and exclusion. Certainly, the elimination of companies or sectors deemed to be ‘sinful’, is one of the best known and most commonly cited forms of ESG investing.
Simple in theory, though arguably more complex to implement, it refers to the strategy of avoiding companies or countries that do not meet specific ESG criteria. This can mean the complete exclusion of companies in the alcohol, tobacco, gambling or armaments sectors, for example; or the exclusion of countries because of human rights breaches or environmental standards. Such exclusion can be a legal requirement or one stipulated in the investment principles of an organisation. Exclusion led mandates offer investors choice, however they have limitations.
Excluding investments in a specific country sounds straightforward. But does this reflect avoiding the securities of companies listed within the region, or those with revenue exposure to that region? If it is the latter what threshold is imposed? What level of monitoring is required to ensure screens remain relevant? And what of indirect exposure, via supply chains or logistics?
We believe that excluding companies based on set ESG criteria also limits investor choice. The use of exclusion-based models could fail to align our investment decisions with the best interests of our clients, if for example, it led to the avoidance of appropriate capital generating investments.
Instead, where companies, sectors, or countries have poor ESG ratings, we view engagement with investee companies as the most effective way of securing mutually beneficial outcomes for both our clients and investee companies. We find working on the basis of engagement or dialogue rather than exclusion, to be better aligned with both superior investment performance and improving ESG performance.
Learn more about our core beliefs – most notably our preference for engagement over exclusion – and how we implement them in portfolio management.
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Kevin Grundy, Managing Director, Fund Management, Europe, Invesco Real Estate, discusses the broader market environments in the region and where he is finding the most compelling investment potential for value-add and opportunistic strategies.
