“I do not see how you can credibly do long term investment without considering environment, social and corporate governance (ESG) aspects,” says Simon Howard, the chief executive of the UK Sustainable Investment and Finance Association (UKSIF). Howard, who for 20 years worked in investment management, might be seen as something of a ‘poacher turned gamekeeper’, but he plays down the ‘damascene conversion’ aspects of his life. “You don’t need to be a sandal-wearing green to be in UKSIF,” he says. It is clear that both Howard and the organisation he heads feel that more can be achieved in partnership with the financial sector than by antagonising them. As UKSIF’s chairman Martin Clarke put it when Howard was appointed: “It is a testament to the importance of responsible investment today and to UKSIF’s role in the field that we have been able to attract an executive of Simon’s calibre as its next chief executive.”
A career in fund management
Simon Howard grew up in Warwick and attended Durham University, where he read history. He started his business life in the brewing industry with Vaux and Allied Domecq. Howard then completed an MBA and moved into the City as a fund manager. He had spells with Friends Provident – where he was head of investments – and 3i Asset Management – where he was the managing director. In 2012 he joined the environmental activist Jonathan Porritt in the latter’s non-governmental organisation, Forum for the Future, a move that signified his gradual awareness of the dangers of climate change and other ESG matters. “I had realised,” he says, “that it was essential that investors change when they are considering the medium term returns of their assets. We face a binary decision – we can carry on as we are and probably get traditional returns for a while whilst boiling the planet, or we recognise ESG threats and move to a more sustainable economy with different returns.” It was in 2013 that Howard joined UKSIF.
The role of UKSIF
UKSIF is in its twenty-third year. Its origins lay with committed environmental campaigners but over time it has changed as ESG thinking has begun to spread. It now has 250 members, including banks, investment management institutions, pension funds and many financial and professional advisory firms.
It describes its mission as being to promote “responsible investment and other forms of finance that support sustainable economic development, enhance quality of life and safeguard the environment”. Howard says that in the aftermath of the financial crisis every financial institution had to look at capital preservation and risk in the context of the requirements of various regulators.
Restoring stability and financial security was key and sustainability considerations did not always fit easily into this. At the same time Solvency II has had the unintended consequence of making it harder for institutions to invest in unlisted assets and for the sustainability case to be made. “At UKSIF”, Howard says, “we try and make the intellectual, academic case for ESG investing and we find that fund managers and bankers are changing and that when the case is well made they will listen.”
Part of the task is to articulate the benefits and offer practical and implementable recommendations – for example an institution might agree that the scientific case for climate change is overwhelming but wonder how they can reflect this in what they do. That’s where UKSIF comes in. Howard says that he doesn’t recommend using environmental or ethical arguments in presentations to an investor since perceptions and beliefs vary widely.
“Don’t throw values at people, you risk appearing to tell them they are wrong, which gets nobody anywhere,” he says. “It’s far more useful and effective to talk probable risk and return changes stemming from ESG issues biting on corporate cashflows with people in the City”.
Sustainability needs to be ‘hard-wired’ into decision making
I asked what UKSIF’s view of specialised ‘green’ investment products was. Howard is a supporter and cited IMA statistics that suggested 1 per cent of retail investment was in them, but he said that the real challenge was for ESG investment to become mainstream. In particular awareness of ESG factors needs to be ‘hard-wired’ into the daily behaviour of institutional investors, such as pension funds. ESG risks should appear on a fund’s risk register and trustees should be encouraged to ask their professional advisers how these risks should be mitigated. He describes this as “active ownership”. UKSIF has taken a pioneering role in encouraging this, describing it as the creation of “the right long-term culture for trustees and their advisers to operate in”.
UKSIF publishes a small booklet on active ownership and lists a number of questions that they recommend trustees should put to their advisers. For example it suggests asking your investment consultant: “Do you think the impact of climate change on asset returns and correlations can be accommodated by your current models? How should we mitigate this risk?”
The definition of ‘fiduciary duty’ needs to change
For UKSIF the fiduciary duty of trustee boards should include sustainability factors. The law commission is currently looking at fiduciary duty and linked questions such as whether the law is right to allow trustees to consider ethical issues only in limited circumstances. Howard believes that the law on fiduciary duty needs clarifying and strengthening, and that an obligation to evaluate long-term, sustainable investment should be clearly stated to be part of fiduciary duty.
He would also like clarification of some kind on this topic, to make it clear that boards of directors or trustees “should give proportionate consideration to ESG”.
He emphasises that he has great faith in trustees and that they already do fantastic work in this area – and that they deserve to have a strengthened legal framework to support them. Influencing the direction of public policy is an important part of UKSIF’s role. There is a political dimension to this.
Howard agrees that ESG issues have traditionally been seen as being owned by the left in politics, but he thinks that the left/right divide is unhelpful and can be too confrontational. “We have to work with politicians of every colour and to make these issues relevant at constituency level,” he explains.
The need for responsible investing should be something on which politicians of all persuasions can unite. UKSIF is a member of Eurosif, which unites Europe’s campaigners for socially responsible investing (SRI) in a single cross-Europe body. Eurosif helps shape public policy on sustainability and UKSIF plays an active part in this helping Eurosif’s efforts to encourage SRI across the EU.
Changes to DC schemes give an opportunity to build sustainability factors
The recent fundamental changes to the rules applying to defined contribution (DC) pension schemes have been food for thought for UKSIF. The problem with DC is that individual savers cannot be expected to take note of responsible investment considerations in respect of their own pots.
There is a “governance deficit,” says Howard. He believes cheme sponsors have a vital role to play here and that they should encourage savings products that have inbuilt ‘ESG aware’ elements in their investment choices. There is, he thinks, post-budget, a big opportunity for savings scheme/pensions/annuity providers to rethink their approach and offers. In particular he thinks they should try and create a ‘lifetime relationship’ with their customers starting when, say, a 20 year old starts a savings scheme and continuing with regular reviews all the way through to retirement. Sustainability factors need to be built in all the way along this journey.
Carrying on as we did in the past is just not an option
Bodies like UKSIF, non-profit-making and advisory rather than executive, need to be skilled in the art of persuasion. Some doors are more open than others – it is easier to influence positively, for example, a large public sector fund than it is to reach and persuade the smaller private sector schemes. Howard is a persuasive and committed believer. But he is also a realist and brings with him the credibility attached to having sat on the fund manager’s side of the desk. UKSIF is small – just six employees – and they take on a very wide range of activities, including conferences, seminars, publications and lobbying. Their role can be made easier by the type of legislative changes Howard hopes will happen. But the real key to a more sustainable future is when fund managers, trustee boards and especially companies and fund sponsors see, like Howard did himself, that carrying on as we did in the past is just not an option.
Paddy Briggs is a former member-nominated trustee of the Shell Contributory Pension Fund