26th August 2014

Standard Life Investment: Ethical investing – a changing landscape

Ethical considerations are becoming increasingly important to investors, as governments worldwide seek to establish improved standards of environmental, social and governance (ESG) practice. Interestingly, investors in our own ethical funds are focusing more on business ethics. So, rather than a simple exclusion mechanism ruling out tobacco and alcohol, they are questioning product pricing and marketing tactics, viewing these as important elements of a company’s social responsibility. Similarly, rather than a straightforward ‘no’ to nuclear power, investors are taking a more pragmatic view of future energy supply, weighing up the environmental costs and climate change arguments of nuclear versus fossil fuels.

There is no doubt that ESG issues can strengthen or damage a company’s intrinsic value, as well as jeopardising its reputation. An example is energy companies, which may be prone to unexpected write-downs of their assets (termed ‘stranded assets’) to reflect the risks presented by climate change regulation. Elsewhere, companies under investigation for bribery and corruption have seen substantial value wiped off their shares (Rolls Royce, HSBC and GSK are recent cases). For this reason, as an investment house, we rigorously analyse ESG factors for all our funds as an integral part of our investment process.

A number of companies positively contribute to the environment and society. Among them, UK-based international packaging firm DS Smith demonstrates a strong, integrated strategy of managing environmental and social factors. In particular, in order to support its corrugated packaging operations, the company operates a ‘closed loop’ recycling business, collecting used paper and cardboard and processing this into new corrugated packaging. DS Smith also shows high regard for staff welfare, actively seeking the views of its 21,500 employees through a two-way engagement process, and continuing to reduce factory accident levels.

In the automotive sector, companies face ever more stringent environmental regulation. Global engineering group GKN has responded by directing its resources towards innovative energy-efficient solutions. As a result, the company is now well-placed to benefit from higher carbon emissions standards being enforced in both emerging and mature markets. At the same time, GKN is taking positive steps towards improving the motivation of its workforce.  
More and more companies are beginning to understand that integrating ESG into the heart of their business models not only protects against potentially significant downside costs but can offer material upside too. As investors increasingly discriminate between those companies with poor track records and those committed to addressing ESG issues, this trend is likely to continue.

The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security. 

Investments, Ethical/ESG