The UK’s FTSE 100 is dominated by fossil fuel, mining and financial companies—how challenging is that index composition from an ESG perspective?
MH: BHP’s exit from its petroleum business and its potential exit from the index may accelerate a trend that we’ve seen over the last few years: companies are becoming ‘greener’ and more ESG friendly. We invest actively, which means we select the companies that we invest in, rather than holding a portfolio that matches the returns of the index. This allows us to put more into those companies that are moving toward sustainable solutions or have stronger ESG credentials. The UK economy and stock market are evolving from an ESG perspective and there are good opportunities to find companies with these credentials.
How important is it to partner with companies to improve their ESG standards?
RC: Most of our clients are people saving for their future and their retirement. We are looking to invest in companies that will provide good, sustained investment returns over the long term. Being active shareholders or ‘stewards’ of companies is an important part of our investment approach and we can add value for our clients by being shareholders that are fully engaged with company management teams.
We want to leave companies stronger after we have invested in them. If we feel there need to be changes in management or we support a restructure of a business, that’s something we’ll be involved in. This approach has added a lot of value over many years. We are very passionate about this. We’re owners of businesses and therefore we’re prepared to invest for the long term, locking away shares in companies where we have meaningful stakes. This gives us an edge when engaging with potential activists, the board and their advisers.
What makes the UK a good market for engaging with ESG issues?
MH: Companies in the UK are very open, so the engagement opportunities are always there. Obviously, it helps when we have larger stakes in companies, but UK reporting requirements mean that companies are transparent. Reporting is clear, the disclosures are good and it’s not just management that we have access to—it’s the chair and the other board members. We’re also increasingly engaging with the heads of sustainability, who are appointed within the company to speak to shareholders about the issues that we’ve been talking about for a long time. It’s good that within companies there is now a dedicated person to speak to about these things.
Over the last few years it’s all coalesced around the common buzzwords, ‘ESG’ and ‘sustainability’. For us, we don’t think the wave of interest in ESG is a new thing—it’s part and parcel of strong corporate governance, which the UK market has offered for a long time through initiatives such as the Financial Reporting Council’s Stewardship Code. UK companies engage with a degree of openness that doesn’t happen in every market around the world.
In what ways can you hold companies to account if they don’t meet their ESG targets?
MH: We’ve spoken about the importance of engagement, but this is crucial when it seems like every company is hanging their hat on their ESG and sustainability credentials. Active, engaged investors like us are needed to challenge management to see if their targets and claims are credible, transparent and true drivers of business success. This is critical as we see more and more companies tying their CEO’s pay to ESG and sustainability targets. These can be fantastic drivers of change, but could also lead to soft targets, which is something we don’t want. As Richard said, we’ve been involved in board, management and strategy changes at many companies. We don’t shout about it, but it’s a central part of being an active and engaged investor. This is especially true in the UK market, where we see clear sustainability and ESG-related valuation opportunities at some companies that are unrealised.
Given the UK market’s underperformance over the past five years, why is now a good time to invest in UK listed companies?
RC: In a world of very low interest rates and a desire for growth, investors have been lured away from UK equities. Combined with this pull away from UK equities, we’ve had more than five years of uncertainty around the Brexit negotiations. That was the prelude and then Brexit almost felt like the final straw for UK equities. But I think you’ve got to take a step back and think: trends tend to overshoot on the way up and on the way down.
Although it’s been a long period where UK equities have struggled, relatively, in a buoyant global equity market, that creates a fantastic opportunity. There’s a resulting valuation cushion; the opportunity cost of other markets looking expensive. You don’t need things to go brilliantly, just less bad. There’s quite extreme behaviour in markets outside of UK equities and I think the real calling card is that investors with a different lens—like private equity and overseas corporates—are starting to be attracted by the valuation opportunities in UK equities.
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