Behind the Fund: Sarasin EquiSar Socially Responsible

1.      What does your research tell you about what people want to invest in?

We noticed that there is a lot of confusion about approaches to responsible investment.  Just look at the number of terms out there: green, clean, sustainable, responsible, socially responsible, ethical!  Secondly we recognised that investors vary in their views on environmental, social and governance (ESG) factors – just as they vary in their investment beliefs and objectives. Thirdly, we saw that there are some strongly held views: a lot of people associate this whole area with ethical investment, and think it’s just about excluding tobacco or investing in solar companies. There’s also a misconception that a more responsible approach to investment could lead to underperformance. Neither of these is necessarily true.

We therefore defined a series of complementary approaches for considering environmental, social and governance factors, that meet the needs of different types of clients.  In response to the research we also wanted to ensure that the approaches are transparent, robust and integrated with the overall investment decision-making.

2.      Can you give us a little history about the fund?

Taking account of ESG factors when investing is in the DNA of Sarasin & Partners.  Bank Sarasin (the majority shareholder our company’s partnership) was one of the pioneers of sustainable investment.  In the 1980s, when a chemicals plant exploded inBasel, the city where Bank Sarasin is based, leaking chemicals into the river, the Sarasin team decided that there must be a way of investing which could take environmental factors into account. Moreover, Sarasin & Partners is a long term, active investor; one of the leading fund managers for charities in theUK; and a partnership – which encourages a culture of stewardship.

The EquiSar Socially Responsible fund was launched when a number of clients for whom we had been managing investments in segregated mandates asked if we could establish a fund.  A fund also enabled clients for whom segregated mandates may not be appropriate to invest in a socially responsible way.  The fund was launched a year ago – on 1 June 2011. 

3.      How have the principles for socially responsible investment changed over the years, and how have you defined yours?

During the past century there has been a steady evolution in how to take account of ESG factors when investing.  The whole area started over a century ago when faith-based investors, like the Quakers, decided to avoid investing in companies whose activities and products conflicted with their personal, or religious beliefs.  “Ethical investment” is therefore rooted in negative screening.  “Sustainable investment” was then developed in the 1980s, when the “green movements” were growing, and focused on investing in companies providing solutions to sustainability challenges, such as renewable energy and clean water, and with positive environmental and social performance.  “Responsible investment” then emerged in 2005 with the launch of the United Nations Principles for Responsible Investment (UNPRI).  Among the six principles of the UNPRI, there is a recognition that investors can use their rights to vote and engage in companies in which they are invested to encourage companies to behave responsibly. 

Sarasin & Partners’ ‘responsible’ and ‘socially responsible’ principles:

Sarasin was one of the early signatories of the UNPRI and our “responsible” investment methodology is aligned with the principles. 

The first of our own principles is simple: the fund does not invest in companies producing illegal products (e.g. cluster bombs and landmines).

The second is more fundamental and considers the potential investment impact of ESG factors.  Before joining Sarasin, I worked at BP. By total chance, I resigned the day before theGulf of Mexicodisaster, but worked a notice period of 3 months in the headquarters whilst the crisis was being played out. It was a sobering period, but an ideal springboard into responsible investment: there you had a safety issue which lead to a dramatic fall in company share price. It’s very hard now for people to say that ESG factors do not have an investment impact.  However, in other instances there is little, or no linkage between a company’s ESG performance and its investment performance.   Recent events at Wal-Mart illustrate this: the company has faced significant allegations of corruption yet following the AGM last week, when a large number of investors voted against several senior directors, the shares closed up at a 12-year high.

The third element of responsible investing is robust corporate governance. If a management team runs a business in its own interests, rather than those of shareholders it can erode returns for investors. There are ways for shareholders to combat this, and there is currently a real focus on ensuring that fund managers act on behalf of clients through voting, engaging, and using their rights as a shareholder to protect value.

This directly relates to the fourth element of responsible investment: collaboration. It is only when investors work together that can they really enact positive and constructive changes in how a company is governed.  Moreover, there is increasing recognition that investors can play a constructive role in engaging with policy-makers who set the regulations and policies within which companies operate.  At theKyotonegotiations over 20 years ago there were politicians, NGOs and companies around the negotiating table – but few investors.  How things have changed now!  The Institutional Investors Group on Climate Change, of which Sarasin & Partners is an active member, is engaging with policy-makers on policies to mitigate the risk of climate change.

Sarasin & Partners’ “socially responsible” investment methodology builds on the four principles above for “responsible” investment and in addition avoids investing in companies whose products and practices cause significant social, or environmental harm, unless there are reasonable grounds for believing that engagement could help the company to improve its performance. 

4.      What’s unique about your investment approach?

Our investment approach has the following key hallmarks:

• Diversified. Many funds invest in geographical areas or single themes (like climate change) but we believe that diversifying is very important as it helps to protect an investment portfolio as well as reaching a wider range of opportunities.  Sarasin & Partners’ global thematic investment approach, on which the EquiSar Socially Responsible fund is based enables investors to access attractive investment opportunities from around the world

• Transparent. We think it’s very important for investors to have transparency, to understand the basis our investment selection, and how we make judgements on ESG issues.  Sarasin & Partners’ global thematic investment approach provides a clear explanation to clients for why we have invested in companies.  Likewise our socially responsible investment methodology enables clients to understand how we are making judgments on complex and nuanced ESG issues.

• Integrated: the methodology for accounting for ESG issues has been designed to integrate seamlessly into Sarasin & Partners overall investment process.  Rather than have a “ESG filter” administered by a separate group from the main investment analysts and portfolio managers, at Sarasin & Partners we make judgments on ESG in a collaborative way.

• Long term. When people are saving or investing, they are often investing decades into the future. Our thematic investment approach identifies long term trends that enable companies to create value over many years.  In turn we are long term investors; typically investing in companies for around three years.

5.      Why should people invest in this fund? What are the financial and non-financial reasons?

Sarasin & Partners’ experience over many years is that it is possible to invest in a socially responsible way without necessarily compromising investment returns. 

Beyond the investment returns, there are a number of reasons why clients have invested in the EquiSar Socially Responsible fund:

-        Relevant: As the “Occupy” camp last autumn and the “shareholder spring” this year show; there is an increasing expectation that businesses and investors should be responsible and not generate returns at the expense of society and the environment.  Many investors now want to feel good about their investments, rather than be challenged over the dinner party table!

-        Advisory Board: The issues surrounding socially responsible investment are often complex. We have therefore assembled an advisory board of experts with a wide range of perspectives which gives guidance to Sarasin & Partners on how best to take account of ESG issues in the investment process.

-        Reporting: Sarasin & Partners’ repeatedly award-winning reporting process ensures that clients can be a real part of our decisions and actions. The quality of reporting we are able give to clients extends right down to individual stocks, as well as how we’re voting and engaging with companies on their behalf.

EquiSar Socially Responsible is an ideal vehicle for investors who are keen to generate healthy investment returns while encouraging businesses to play a constructive role in relations with society and the environment. As one of the leading fund managers in theUK, we have been managing investments for charity clients (incorporating more responsible approaches to investment) through segregated mandates for 10 years. Launching a fund which allows our clients to access a socially responsible investment vehicle was a natural progression, grounded in our considerable experience and expertise.