Ethical investing is a popular investment class, but hasn’t traditionally seen the best returns for investors. RBC however has unveiled a new way of looking at ethical investing that builds on the existing models to provide both greater returns and yet continue to provide a level of moral comfort for clients. Mike Cobb reports.
RBC’s model is being named ‘Sustainable investing’. The bank’s head of portfolio strategy, George King, and the head of charities, Nicholas Reid, took time out to talk to Private Banker International about what it means for clients.
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Sustainable is a difficult term to define agree King and Reid. To some it may mean an investment that delivers a long term ethical objective, to others it is investing in impact projects.
RBC believes that for investors there is a spectrum of sustainable investment options and clients themselves form that spectrum.
The spectrum runs from what RBC describes as ‘unconstrained investing’ to philanthropy.
At one end the unconstrained investor is happy to invest in whatever company or sector as long as they make money. At the other the investor is more interested in donating to good causes than making money from such actions.
In-between sits the more traditional and ethical investment models. The older model, the socially responsible investor, has traditionally looked at potential investments negatively, paring off sectors and companies that do not fit their ethics.
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By GlobalDataThis model presents problems. However says King: "It becomes hugely difficult to define as it’s so individualised. Let’s take the tobacco example. Let’s say that we agree that we don’t want tobacco in the portfolio. The actual implementation of that is very difficult. Does it mean tobacco growers, tobacco sellers? Is it retail, is it how much of your business? Is there a threshold?"
There is also a difficulty in drawing a line describes King. "Does a chain of news agents come under the banner of the tobacco industry if they make more than 10% of revenue in cigarette sales?"
So the very simplicity of this investment profiling tool means it may not be for everyone.
And as King says the image of such investment profiles are not good as their returns have been traditionally poor.
For some, notably charities, this method of investing is still something they are forced to pursue, whether through their charter or by personal affiliation.
When they are given leeway to invest in borderline industries often the restrictions can cause problems for the wealth manager.
Reid details for example just how much monitoring the hypothetical newsagent would be just to be sure they weren’t going over a 105 tobacco revenue limit.
For others the principal behind their investing is not about excluding sectors and companies but examining the company’s attitudes to what Reid describes as a distillation of the ten United Nations principals.
These environmental, social and government (ESG) principles examine how a company deals with its resources and waste, treats staff and the community, and how the business is governed.
While this system is an inclusive rather than exclusive method of investing it often lacks a long-term outlook on a sector or company.
Sustainability RBC then sees as the future of ethical investing as it looks at each company on its own merit and also as a global entity that may be operating in the same market for some time.
By this the pair believe that a differentiating factor in what they do is to be able to look at a similar company in one sector and examine if its current behaviour will affect its ESG or ethical position further down the timeline.
As Reid explains: "In any given sector, are any of them demonstrating a long-term sustainable characteristic in their business model? Are others clearly not? Depending on which sector you alight on, some of these flag up quite strongly and quite easily, but there will be an awful lot where there are shades of grey."
He continued: "So if you go in the mining sector for example, it’s quite easy to see those who aren’t behaving sustainably. But you could say that’s not very sustainable against another business in the sector which seems to be acutely aware of its responsibilities and is trying really hard. Then does it have the prospect of being a good investment for my client?"
And this can go further looking at companies that would not normally have fallen into either ESG or ethical profiling either.
An example would be to look at a company that is exploring a technological route to a more sustainable future rather than take a headline but short-term solution to a problem.
This methodology is not new King concedes, it is an extension of conventional portfolio selection practices.
"A modern sustainable fund manager is going to be looking at the same things as any other fund manager, but adding these additional factors, making sure that the company has a great management but also looking at what they are doing to the planet."
By doing so RBC believes it can open up new business sectors and companies to a new generation of ethical investors.
With this methodology in place, the sustainable investment criteria has more potential to both have an impact on the businesses it invests in and also make money for the client.
And in so doing RBC thinks the sustainable investing model will not only be popular for existing clients but also attract new ones.
