Partners Capital are committed to a policy of socially responsible investing. We have always sought to back asset managers who have high integrity, are principled and are focused on long-term results. These managers are thoughtful about the companies in which they invest with a high regard for social and environmental welfare. Good corporate governance is always an area of their focus given the strong link it has to company effectiveness. We are encouraged by the developments of measurement standards around environmental, social and governance (ESG) factors of both private and public companies. We believe that this single development has the potential to draw a closer link between social and environmental impact and financial performance. We are however, acutely aware of the challenges to arriving at a single standard measurement system, and this is likely to be still three to five years away from being achieved.
Different clients take a different view on the degree to which their pools of capital should be a tool for social activism or specific mission-driven purposes. Some merely want to be assured that their investments are not causing harm. We help our clients wrestle with these issues and support them in devising and executing a clear responsible investment strategy that best serves their needs, while still achieving long term investment performance at the top of their peer group.
To this end we have created a framework to assist clients develop and implement responsible investment policies. Those policies are typically a tailored combination of these four components: 1) exclusionary screening and ESG scoring, 2) ESG integration, 3) impact investing and 4) mission-driven impact investing. Each of these policies is described in the table below.
|Responsible Investment Policy||Description|
|Exclusionary Screening and ESG Scoring of companies in which the portfolio is invested. Aim to maximise the portfolio’s “score” against an accepted measurement methodology||Fund Selection: Positive and negative screening can be achieved through specially constructed passive index funds or ETFs or by only working with active managers who comply with the exclusions or otherwise focus on positive ESG sectors.
Negative Screening: Under the “no harm” principle, portfolios may be constructed to exclude certain companies and sectors which are believed to have undesirable employment practices or produce goods or services which do social or environmental harm. This could include sectors like tobacco and arms or individual stocks such as those screened out by the Norwegian Sovereign Wealth Fund.
Positive Screening: Portfolios can also be constructed for positive screening by overweighting investments in companies or sectors known to have more positive impacts or which adhere to the values of the institution.
ESG Portfolio Scoring: There are standard ESG scoring systems which investors can apply to all private and public company investments to arrive at an average overall portfolio ESG score to compare against market averages or peers in order to know one’s relative impact. Examples of available ESG scoring data include MSCI, Sustainalytics and RepRisk.
|Integrate ESG criteria into the investment decision making process||This involves close working relationships with each client portfolio’s underlying asset managers in order to assess the degree to which non-financial ESG criteria are being factored into all investment decisions.
Different Partners Capital clients have different thresholds for asset manager adherence to ESG investment criteria.
Each client’s portfolio will have a measure of ESG integration capturing the percentage of underlying asset managers at various stages of ESG integration with long term targets for the level of manager compliance desired.
We work closely with our asset managers to educate them about best practices in ESG integration into all processes.
|Impact Investing||ESG screening and scoring and ESG manager integration can have an impact and are actions broadly falling under the definition of responsible or impact investing.
Here, we discuss the narrower definition of impact investing to include any investment in any asset class which the investor believes can have a direct positive social or environmental impact. This includes so-called impact investment funds which only invest in companies or instruments that target specific described social or environmental impact.
Examples include: 1) direct equity or debt investments e.g., solar energy, hospitals, 2) third party funds with a social impact mandate, or 3) Social Impact Bonds
|Mission Driven Impact Investing||Any investment in any asset class which the investor believes can have a positive social or environmental impact which aligns with the specific aims, mission or purpose of the investor and is intended to generate a financial return.
Our clients invest directly in such investments or via third party funds and social impact bonds whose mission is aligned with that of our client.
Once a responsible investment policy has been agreed by our clients, Partners Capital populates the portfolio with specific investments to adhere with that stated policy. Each of those investments undergoes our normal rigorous due diligence process by the Partners Capital research team which includes an assessment of a) how environmental, social and governance issues are incorporated into decision making and b) the specific impact an investment can potentially have towards achieving its impact goal.
A major development in responsible investing is the growing ability to measure the impact of various strategies on the specific targeted social and environmental issues. The industry is currently coalescing around two different impact measurements: 1) the direct and specific impact an investment has on a pre-defined objective e.g. literacy rates and 2) the scoring of a company based on broad set of pre-defined ESG criteria.
Impact measurement usually takes the form of a number of specific metrics which the investor believes to be pertinent to the social or environmental issue being addressed. For example, an impact investment in a hospital in a rural region of a developing country could be judged based on pre-defined metrics such as the increase in the number of hospital beds or the number of lives saved. Both impact funds and traditional asset managers alike are beginning to produce annual reports which monitor the improvement of such metrics during the life of the investments.
The second common measurement, more often used by public equity and credit investors, are standardized rating systems which assign each company in a portfolio a score based on adherence to agreed ESG factors e.g. carbon emissions, product safety, tax transparency. The performance of the company against each of these factors is aggregated into a single score allowing comparison of a portfolio against the broader index or a peer group. Many private equity firms have developed their own ESG measures to be applied to their portfolio companies. For an excellent example, see the latest Apax Partners Sustainability Report on their website.
In a similar vein to our production of detailed financial performance attribution for clients, we believe that the social or environmental impact of a client’s portfolio should also be measured and reported. In addition to the metrics described above, Partners Capital’s Responsible Investment Dashboard also includes the portfolio’s exposure to the “sin sectors” and a proprietary measure of the degree to which the underlying managers within the portfolio integrate ESG into their decision making processes.