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Word on the Street: featured podcast

Sustainable investing – how to save the world?

15 May 2020

Nicky Eggers, Head of Investments, discusses sustainable investing with our Head of Behavioural Finance, Rob Smith, and Ian Aylward, Head of Manager Selection. They talk about whether this lockdown will change our way of life forever to the benefit of the environment, and how investors can make money and achieve their societal and environmental objectives.

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  • Welcome to Word on the Street, a weekly podcast from Barclays UK where our experts help ordinary investors make sense of the latest news and events impacting the world’s financial markets.

    Nicky Eggers, Head of Investments, discusses sustainable investing with our Head of Behavioural Finance, Rob Smith, and Ian Aylward, Head of Manager Selection. They talk about whether this lockdown will change our way of life forever to the benefit of the environment, and how investors can make money and achieve their societal and environmental objectives.

    NICKY EGGERS: Hello, this week we're going to be discussing a topic that we haven't spoken about before on the podcast: responsible or sustainable investing. And to help us navigate through this proverbial jungle, I'm joined by a trio of experts: the head of our external manager and fund selection capability, Ian Aylward, the ever-composed Rob Smith, and our resident CIO, Will Hobbs. And so first off, Will, can you give us the latest from the wider markets before we get into the meat of today's podcast with Rob and Ian.

    WILL HOBBS: Yes, hi Nicky, hi guys. So you've seen a couple of things of note I think. On the virus itself there have been some fresh outbreaks in Asia among other places. One outbreak was associated with a cluster of nightclubs in a particular district in Seoul and there you've seen last I saw actual cases are in the low 100s so about 133. But so far the authorities have tested some 35,000 club visitors and their respective family members, which I guess is a good illustration I think of both the difficulties of returning to normality as you relax some of the constraints that you've imposed on your population but also the efforts required to manage the inevitable outbreaks that will occur as we delicately try and relax containment in much of the Western world. It’s going to be tough no doubt about it and there is an obvious trade-off between relieving some of the terrible economic privations that many parts of society are suffering and obviously public health. To give you an idea, yesterday you had a speech from the US Federal Reserve chair, the world's most important central banker I guess, and he pointed out that 40% of US workers earning below $40,000 a year are out of work. So policymakers are really trying to work out what a smart reopening looks like. Highest priority is reopening parts of the economy, if you think about it, that give you the biggest effect on GDP and employment, positive, for the lowest health risk. It's almost easier to think about this equation in reverse: what are of the activities that have a low impact on GDP and unemployment but a high risk of in terms of reawakening the virus which is now endemic to the global population. So things like car shows, flower shows, pro sports in the US, 4th of July celebrations, all of that stuff is very unlikely to come back for a while, But I think up my final point would be that Asia is proving that it is possible to return to some normalcy without a vaccine but it's a delicate balance.

    NE: A tightrope to walk there. So Rob, Ian, I know you guys have been itching to come on and talk about this subject, sustainable investing or ESG, but obviously we've been really very distracted by everything that's been going on in the economic space, not least because of the coronavirus for the last few months. But actually, talking to you guys today about ESG, I think is really timely. Many people will have seen some of the pictures that we've seen on social media: for example, the Venice canals suddenly the water being clear and being able to see fish returning, the impact on air quality because of the lack of economic activity that we've seen. So just starting with you, Rob, if we could. Can you help define this space? So when we're thinking about investments, obviously we're used to talking about financial returns. How is sustainable investing or ESG different?

    ROB SMITH: Hi Nicky. First, we let's just take a bit of a step back and start with the fact that all investments have an impact, so whether we choose to acknowledge it or not. The reason I think that this topic is quite timely is that the coronavirus pandemic as you mentioned is really highlighted how a company’s or industry’s’ activity can either positively or negatively impact the economy society and the wider environment. So as an investor in the equity through shares or debt through bonds of a company, you provide capital to finance that company's activity. So sustainable investing as the name suggests takes consideration of these impacts into account when making investments. So through the consideration of environmental and societal issues it is hoped that investors and companies are aware of both the potential opportunities and the risks that these issues present.

    NE: So you just mentioned that in the context of sustainable investing, but many of us hear “ethical” being mentioned. Are they the same thing?

    RS: Not really. Let me just tackle ethical investing, that might clear it up a little bit. Ethical investing is a way of expressing your values typically by avoiding investment in companies that are considered unethical. It's been around for a long time and charities typically have been investing this way for decades. Now although what people consider to be ethical can be different, generally there are ethical investments or funds tend to exclude what you may have heard called sin stocks, those are companies that include the tobacco companies, gaming companies, adult entertainment those sorts of things that are generally considered as bad services or goods. Ethical investing typically only considers the product or service that they offer and if you don't agree or you don’t find it ethical you simply don't invest, whereas with sustainable investing because it’s not only the product or service that a company is producing but also you consider the way in which the company is operating and the impact that that has on the wider surroundings. Although sustaining investing can still and will still include or involve I should say excluding some companies or industries, you may also see ownership of companies or industries within sustainable investments that you might consider bad, such as the oil industry and fossil fuels. Now the reality is that owning some of these companies is still an important part of a transition to a lower carbon economy and there are other ways rather than just exclusion, through active ownership and engagement with companies, that you can also have an impact, or an investment impact, on the wider environment and society.

    NE: It just strikes me that maybe one of the things that doesn't help us too much in this investment spaces is the amount of different terms used. It is quite confusing isn't it?

    RS: It is yes and I read something that said there's over 80 different terms and various approaches under the banners of sustainable investing. And so it can very confusing. I think just to try and give some clarity, if we think about the investment process, then it's probably best to describe investing as a spectrum of different approaches which can have different financial and impact aims. So imagine on the far left-hand side you have your ‘traditional’ investing, where you don't consider the outcomes for people and the planet, only the financial returns and risks of the investment that you're making. Then on the far opposite, on the right hand side, you have philanthropy or charitable giving where you have no expectation of financial returns but you give in order to try and generate a very specific outcome depending on the cause that you're giving to the charity. Then there are some approaches in between. Now here’s where it gets a bit confusing because there's not necessarily industry-wide, clear-cut definitions on exactly what each word means.

    The reality is that some approaches blur across definitions but I think the important thing to understand is that there are some approaches which tend to focus on preventing significant negative effects on important outcomes for people and planet and often this is done by avoiding the investments that hold significant environmental, social, and governance or ‘ESG’ risks. Then there are approaches that focus on positive outcomes and benefiting all stakeholders, this is often for consideration of what the company or the firm is doing or producing as a product that is for the good and how that's helping to progress some of these issues forward whether it be the environment or wider society. Both of these strategies can often deliver or try to deliver I should say competitive financial returns. And then you have this area of what's called ‘impact investing’ where the focus tends to be on contributing to specific solutions and delivering specific outcomes. Again there's a range of different strategies within here and some will target competitive returns some will tolerate lower returns for increasing the impact that they're having.

    NE: Thanks Rob, that that's really helpful. Ian, can I just turn to you. Perhaps you could elaborate a little bit on what ESG means and why should investors, who might be listening to this podcast, might they care about them?

    IAN AYLWARD: Sure. Hi Nicky. ESG really stands for environmental social and governance. As Rob, says there are lots of other terms that we hear, like ‘responsible investing’, ‘sustainable investing’, ‘citizenship’ but essentially they're used interchangeably; just think of them as the same thing. Now taking each of the E and S and the G in turn, environmental refers to the impact on the planet of the firms that are invested in. Social refers to how those companies are contributing to society in a positive way and governance refers the structures of how companies are being managed. So perhaps to give an example of each, environmental might consider the pollution that a factory produces or the impact of its deforestation activities; social might consider labour relations or how suppliers are treated and arguably interestingly this has become perhaps or has been historically the least tangible of the three, but it has really come to the forefront in this in this pandemic as it becomes clearer which employers are doing their best to treat their staff and suppliers as fairly as possible and which less so; finally governance, the G, is the area which fund managers arguably have been considering for the longest, things like board composition, remuneration policies. In the UK that dates right back to the Cadbury Report of the early 1990s and if some of our listeners may remember Robert Maxwell and Asil Nadir from Polly Peck. But ultimately the bottom line is if people care about the future of the environment and how the companies support it and ensuring that companies are governed in a sustainable manner, then they should certainly consider ESG risks.

    NE: Good and I think it's worth touching a bit on performance. I know Rob mentioned it can be a very broad area looking across ESG and impact but what do you say to those listeners that might be worried that investing in this way is some trade-off with the kind of returns that they might be seeking?

    IA: We don't necessarily see that trade-off between doing good for your wealth and doing good for the health of the planet and society if I can put it like that. There's been a huge number of academic studies looking at this question over the years and whilst many suggest that returns are improved by considering these topics, the evidence is not wholly unambiguous. Where there does seem to be consensus over though, is that investment risks are reduced by considering these topics and so that has to be a good thing right?

    NE: Yes, so avoiding the real bloopers as opposed to perhaps keeping up with all of the winning strategies that might be out there. And I know we certainly, across our client base here from institutional and the higher net worth investors, some demand requests around ESG but it seems as if there isn't quite so much conversation across the larger retail investor base. Is that the case or if that is the case why do you think that but that is so?

    RS: I think it's a very interesting question and I think the demand for this type of investing among the retail investors’ space tends to be what we call the latent demand, that is it exists but to some extent it's hidden and what I mean by that is that the research that we do and lots of others have done and to some degrees you would expect. when you ask people: do you care about the environment and wider society, do you feel a responsibility to make it different or do you want your investments to be made responsibly? People overwhelmingly say, “Yes”. Who's going to say “no” to that sort of question? However, when you then look at how many retail investors are then actually doing this and investing responsibly or in responsible sustainable products, then you see a huge gap. We did some research in originally in 2015 and then followed it up in 2018 and we found that whilst 56% of investors were interested in impact investing when we explained it to them, only 15% had engaged in any activity in that area. Whilst that is increased from what we saw in 2015, it's obviously still quite a significant gap.

    NE: And why do you think that is, Rob, what barriers do you see?

    RS: I think one of the biggest barriers is that many of the issues such as climate change or the social issues occur over a very long period of time so their effects are very incremental which means that they're not hugely salient, they're not necessarily the front of our minds at all times, most people aren’t walking around making every decision they make in the context of how is this impacting the environment as I'm now suddenly very aware of it. As I said, the changes happen slowly over time and as you mentioned at the start, Nicky, there's no doubt that the impact we have on the environment has been made much more noticeable through this current crisis and some of the images that have been shown around. But I think in addition to that, how you can help reduce the impact or even tackle these issues by investing, it's not immediately clear or well known. So even if you did have that in your mind when you came to thinking about investing, for a novice how can that affect my decision-making is not is not necessarily clear. Many investors may don't even realise the impact good or bad of their investments I think. Finally, it's worth thinking about that previously, investors may have felt the only way to have an impact was through investing in small, early-stage unknown companies, those that are really trying to change the world if you like, which are inherently risky and also pose a lot of unknowns. But the truth is that you can have an impact through stocks and well-known companies such as Microsoft, Nintendo, and BT, and this type of responsible investing that can help remove any barriers from a lack of familiarity.

    NE: And Ian, if I could turn to you. What Rob’s describing there is perhaps the landscape is not making it particularly easy for retail investors to navigate their own way through this. Perhaps you can just tell us a little bit about how do we approach that at Barclays?

    IA: At Barclays we've actually been investing responsibly in a number of different ways for some years now. Let me just perhaps run through a few of those, starting with them the United Nations. The United Nations established its principles of responsible investing and we've been a signatory for over three years now. These principles aim to provide a menu of actions that allow signatories to contribute to developing a more sustainable global financial system. I'm very pleased and proud that we're A-rated actually by the UN for how we apply these in our investment processes, particularly as it pertains in selection of external fund managers. Secondly, we do have an exclusionary screen across all our products and that relates to defence activities. We have a defence policy that essentially precludes investment in companies, debt or equity, involved in certain particularly unpleasant activities, such as the production of cluster munitions, or depleted uranium weapons.

    The final thing I'd say is, when we select all the external managers, that's all external managers right across our book that we typically employ to manage our client assets, then we embed an ESG assessment into our framework. Within that framework ESG aspects of every fund are explicitly scored: one is within investment philosophy and the other is within the investment performance or positioning. The former considers how the fund manager works ESG considerations into their investment process, idea generation, risk controls. I like to think that as the inputs if you like, whereas the latter considers how this is reflected in the actual portfolio holdings: does it tally what would expect philosophically? I think of that is that as the output. It should be clear then I think that the ESG considerations are embedded right across our investments. And we're not stopping there actually. We recognise the importance of voting and engaging directly with the underlying companies that we hold. Just as we delegate the selection of the companies to external managers, so we delegate the voting and engagement to an external firm. We've already chosen that provider and so we will shortly have many of the world's leading specialists both investing our clients’ assets and voting and engaging on them for us.

    NE: That's great. I know that we've got a specific fund that's very deliberate in considering the impact that the investments within it have and that's managed by your team, the Multi-Impact Growth Fund. Can you tell us a little bit more about it?

    IA: Absolutely. Whilst I believe it's good to know, I think it's good to know that Barclays is taking its investment responsibilities seriously in all sense of the terms. Many investors want to go that step even further and actively invest for good. Now by that I mean investing not just for positive investment turns and avoiding investing in some nasty firms, but in order to also have an explicitly positive impact on society and the planet. Now they’ve been strong growth and number of such funds recently in this space in the industry. And yet we've had at this fund in place for over two and a half years now. As you say it's called the Multi Impact Growth Fund. Its award-winning, it's a one-stop-shop blend of leading equity and bond funds all focusing on having a positive impact. Example holdings include a fund targeting alternative energy and efficiency, a fund targeting social bonds, and a fund targeting green bonds. And the Multi Impact Growth Fund harnesses all the tried and tested elements of our investment toolkit such as tactical asset allocation and manager selection and successfully applies that to the impact space.

    It might help if I give a couple of examples just to bring it to life, perhaps one equity in one bond? On the equity side, EDP Renewables is one of the world's largest producers of wind energy. Extraordinarily, even today almost a billion people globally are functioning without electricity and of course wind farms, wind energy, can address both this need and reduce the amount of carbon dioxide going into the atmosphere compared to traditional ways of generating energy such as fossil fuels. In terms of their sustainable development goals this targets number seven, affordable and clean energy. Perhaps I'll wrap up with the bond example. There is a co-op sustainable bond that's actually the first bond from a retailer in the UK that aims to meet a couple of these SDG’s, that's number four, quality of education, and number eight, decent work. Now farming today is still the largest employer in the world; it provides livelihood for 40% of the globe's population. The proceeds from this bond, we use to distribute and develop Fair Trade products, boost marketing, and also to train and advise the farmers all with the aim of providing a better life for them and their families.

    NE: That's great, really insightful. And of course you've mentioned a couple of firms there. They're not recommendations. Clearly anyone who’s listening would need to decide for themselves or get advice if considering investing in anything that's been mentioned. So just back to you, Rob, given the current situation where we're all in, and generally we are seeing behavioural change from society, what can we infer about the future when it comes to the environment and other issues?

    RS: It's interesting I think. There's a lot of speculation about how the crisis will change people's behaviour and sometimes drastically and into the future. But the reality is that it's still too early to tell what the effects would be on behaviour, sadly. What we do know is that habits can be very strong and be very difficult to stop, but it's also pretty hard to create new ones and new behaviours, especially if there's some short-term cost. Now this current situation we’re in, the reality is that the choices have been taken away from us with a large part, so our hand has been forced, so the behaviour that were exhibiting we don't have a choice over.

    So the questions about how we’ll behave into the future are still very much undecided. Will we be much more environmentally friendly and take these considerations on board more? It's really difficult to say, I mean the thing is what I do believe that certain trends have obviously been accelerated by this process, so especially as this period is prolonged and the choices are taken away from us for longer, the likelihood is that some of those choices may still be made when those lockdowns start to disappear. So working from home is the obvious one, and therefore the amount of travel that people do, will that be reduced? And the answer is probably “yes” but to what extent, it's really difficult to say at this point in time.

    NE: I guess well as you say time will tell whether people convert from mass transportation to cars, we hope it's all walking and bikes, but that that will remain to be seen won’t it? And Will, any further thoughts from you, I don't know whether the kids are around, the dog, obviously we're keen to hear their thoughts as well.

    WH: Basically what they said, as I told you, the first thing I did this morning was step into the dog's business, that was my first step this morning so I'm hoping that the day has improved since then. The main thing I think, I’m back to the real topic, it’s a great option for investors. Before all of this, a long time ago, previously your option was as an investor was really if you wish to express specific society or environmental objectives, it was really just not to own stuff. I mean the guys have highlighted some others as well, but that was your main option. So to have the ability to target and hopefully profit from specific environmental, societal objectives is a real game-changer and hopefully both not just for the investors but hopefully for the ends that they want to achieve. It's a great development in the investment industry.

    NE: Yes, and one that has seen real acceleration as you mentioned with the UNPRI that becoming way more mainstream. I'm sure there'll be a lot more that we'll want to discuss, so perhaps Ian, we’ll have you on standby if that's okay and we'll bring you back when your diary allows and air things remain a little bit quieter in coronavirus land. But anyway, it just leaves me to say thank you very much, Ian, Rob, and Will and thank you to our listeners. We'll be back with another Word on the Street very soon.

    All investments can fall as well as rise in value and their past performance is not a reliable indicator of a future performance. This podcast is not a personal investment recommendation.

Our experts

Nicky Eggers

Head of Investments

Nicky leads the investment team and is responsible for delivering engaging and relevant investment solutions for our clients and customers.

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Will Hobbs

Chief Investment Officer

Will joined Barclays in 2005 and now leads the team focused on the core aspects of the investment offering. With nearly 20 years’ experience in the financial sector, Will frequently contributes to Bloomberg, CNBC and more.

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Ian Aylward

Head of Manager Selection

Ian has over 25 years of experience managing investments for a variety of firms in a number of countries. Recognised as one of the leaders in his field, at Barclays he manages the team responsible for external manager selection and leads our responsible investing activities.

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Robert Smith

Head of Behavioural Finance

Robert joined Barclays in 2011 and now leads our efforts on implementing insights into investor psychology to help lead clients to better outcomes. Robert has over 12 years’ experience in the finance industry, and frequently presents externally to client’s and industry.

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Things to consider

Please note that past performance of investments is not a reliable indicator of their future performance. All investments can fall as well as rise in value and you can lose some or all of your money. Additionally, this podcast is not a personal investment recommendation.

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