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Responsible investment
in a diversified growth fund

Our viewpoint

This guest blog forms part of our responsible investment in practice series where we talk to a number of investment managers about their approach to responsible investment in different asset classes.

Franziska Jahn–Madell, Manager – Responsible Investment joined Ruffer in 2014 after working for ten years at EIRIS, a research provider for environmental, social and governance performance, in several positions.

Q: How do you incorporate ESG into your investment approach?

As an absolute return manager with a relatively concentrated portfolio, we are able to conduct thorough due diligence on ESG risks and opportunities prior to making any investment and thereafter carry out active stewardship activities, such as voting. Since we offer segregated portfolios – even for relatively small mandates – we are able to incorporate clients’ values by excluding or including specific holdings for their portfolios.

ESG issues are documented and discussed, where relevant, at each stage of our investment process:

  • idea generation
  • meetings with company management
  • stock note
  • stock review meetings
  • conviction reviews

Analysis incorporates all aspects of a company’s operations. ESG is one layer in the risk assessment carried out prior to investment.

Q: What is distinctive about your ESG and stewardship approach?

Engagement, specifically engagement with senior management. We believe that ESG factors are often a signal of management quality, particularly over the long term. Ruffer’s Manager for Responsible Investment partners closely with our analysts to raise awareness of risks and impacts to the environment or society that could arise as a result of poor management of a company’s operations. We then engage with the Chief Executives and Chief Financial Officers of the companies in which we invest clients’ money. We believe that engaging with companies to improve their awareness of, and compliance with, ESG delivers superior outcomes and returns compared to simply ‘avoiding’ companies with poor ESG standards.

Q: How do you engage with the companies you invest in?

Direct communication with a company is a fundamental part of Ruffer’s investment effort. We engage proactively through meetings with senior executives, conference calls with Investor Relations and corporate ESG teams, investor days, ad-hoc enquiries, industry groups, and, if necessary, shareholder resolutions. Engagement gives us an opportunity to improve our understanding of investee companies and their governance structures, and to inform better our investment decisions. 

We regularly monitor and engage with companies on matters that we perceive as risks to long-term value creation such as, but not limited to, strategy, performance, risk, capital structure and ESG, including culture, board composition, succession planning, remuneration, carbon and water disclosure, and workers’ rights. 

Engagement case studies are disclosed in Ruffer’s annual ESG report which is publicly available on our website: http://www.ruffer.co.uk/#institutions/our-approach.

Q: How do you manage climate risks in the fund?

Climate risks, like all other relevant ESG risks, are considered and integrated throughout the investment process. We also address climate change through our stewardship activities and are active in several industry bodies. Ruffer has supported the collective engagement initiative ‘Aiming for A’ by co-filing and voting for the shareholder proposals which are encouraging companies such as BP to reduce operational carbon emissions, maintain a portfolio of assets resilient to future energy scenarios, and support low carbon energy research and development. In 2017 we have become supporters of the Transition Pathway Initiative, which assesses how companies are preparing for the transition to a low-carbon economy. We use the assessments as the foundation for our climate change engagement theme.

Q: What do you see as the barriers to investors adopting an ESG approach to their investments in this asset class?

We perceive several key barriers to a greater number of asset owners becoming more engaged on ESG issues in general and the climate issue in particular:

  • The biggest fear for asset owners is that integrating ESG will jeopardize returns. Trustees worry that fiduciary duty does not allow for non-standard investment decisions. Trustees are unsure which ESG issues to prioritise in their investment approach and often do not have access to external or internal resources. The assumption is that responsible investing is really an optional extra that adds to investment costs, rather than the more sophisticated approach to portfolio risk management it has become.
  • In the diversified growth sector, there are polarised investment approaches which make ESG more, or less, challenging. Some managers (like Ruffer) have relatively concentrated portfolios of shares which allows for proactive engagement with investee companies; some managers take equity risk through index funds or ETFs, which multiplies the ESG challenge by an order of magnitude; other managers short stocks, which rarely allows for engagement.
  • For investment managers like Ruffer, barriers include the lack of transparent, standardised and quality ESG data from companies, however, this issue has significantly improved in recent years. It is hard for many investors to make asset allocation decisions without fundamental research linking climate change ESG to prospective investment impacts, and without having a clear process for considering such non-financial issues in their investment processes.

At Ruffer, we believe these barriers can be overcome. To determine a strategic direction, trustees and investment managers need to develop their own governance systems that are responsive to long-term trends and related risks and opportunities. Where there are information gaps, decision-making should be supported by using the best available evidence. Regardless of their complexity, ESG issues like climate change cannot be avoided and are increasingly integral to investing. It’s far better to address them proactively than to fall behind the curve.

Ruffer LLP is authorised and regulated by the Financial Conduct Authority.

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The views and opinions expressed in this blog are the current views of the author only. Lane Clark & Peacock LLP (“LCP”) does not endorse or recommend any particular products and does not warrant the completeness or accuracy of these views. They do not necessarily reflect the opinion of LCP. In no event will LCP, or its partners, employees or agents, be liable to you or anyone else for any decision made or action taken, in reliance on the information in this blog.