This year could very well be the year of the activist investor. Both individuals and organisations are taking a more proactive approach when it comes to investment portfolios, both in shifting their assets into more socially responsible investment vehicles and using more sophisticated techniques to pressure boards into responsible action. From climate change to executive compensation, companies are feeling the force of a more engaged and passionate investor base.
As a result, the demand for Socially Responsible Investments (SRIs) is rising. In a survey undertaken by Triodos Bank in October 2016, 62 per cent of British investors said that they would like their money to support companies which are both profitable and make a positive contribution to society and the environment. Even more encouraging, almost half of respondents (47%) believed that companies trying to make a positive contribution to society and the environment are more likely than traditional companies to succeed in the long run. This is a significant step-change in investor perception. The long-held view that sustainability and profitability are diametrically opposed is starting to crumble: in the future, the most profitable companies will also be the most sustainable.
The Triodos Investment Management (Triodos IM) SRI portfolio is built around this fundamental assumption. As such, Triodos IM applies a two-pronged approach to maximise the social and financial performance of its 1.3 billion EUR in managed SRI funds: a rigorous selection process that clearly defines the investment universe and an active shareholder stance that encourages companies to move in a more sustainable direction. The result is a method that invests only in companies that achieve and advance positive impact.
The Sustainable Investment Universe
As an investor, Triodos IM seeks to serve as a catalyst in the transition to an economy where people and planet come first. At the heart of this goal lies the belief that businesses must achieve the right balance between their social, environmental and economic performance. The companies that do this well are the ones that will deliver the greatest value to all of their stakeholders, including their shareholders.
As a result, the Triodos IM SRI funds consist of only companies that fulfil strict environmental, social and governance (ESG) criteria. These criteria constitute the Sustainable Investment Universe, which is created by the research team to maximise both the sustainability impact of the funds as well as long-term profitability. Currently, 287 medium and large publically-traded companies have been selected, of which 137 are investee companies.
Triodos Research chooses companies using a three-stepped approach. The first two steps actively seek out companies whose primary business is actively contributing to the health and well-being of people and planet (step 1) and companies that are best-in-class sustainability performers (step 2). Finally, all companies in the Sustainable Investment Universe must meet the Triodos minimum standards which ensure that companies that offer unsustainable products, like weapons and nuclear power, and have unsustainable production processes in place, such as the violation of human rights and environmental damage, are excluded from our Sustainable Investment Universe.
Minimum standards are dynamic and evolving, reflecting the latest developments in research and society. In practice, this means that they are being continually tightened to ensure that the investment universe only includes companies that are setting the pace in sustainability.
“The Sustainable Investment Universe is populated with companies that have the potential to effectively balance current sustainability needs of people and planet and long-term profitability for the Triodos SRI funds themselves,” says Rosl Veltmeijer, head of research at Triodos IM. “Our starting point is always the sustainability performance because we want our funds to invest exclusively in companies that deliver the greatest added value to society and therefore are best equipped to perform well in the long run.”
“Using ESG criteria as the basis of our decision-making is much more forward looking than basing decisions on financial figures which mostly look backward,” she explains.
It is on the foundation of robust ESG criteria that a number of different retail products are built, each reflecting different risk profiles—a key consideration. Because capital is at risk and the value of an investment may go down as well as up, investors may not get back the amount they invested. Similarly, due to the international nature of the funds, currency fluctuations may affect the value of the investments. But by using a long-term outlook to evaluate companies in the Sustainable Investment Universe, Triodos IM seeks to deliver a more stable absolute return than funds trying to beat short-term benchmarks.
Defining the Sustainable Investment Universe is only one side of the Triodos investment strategy. Once companies have been selected, Triodos defines a strategy for engaging in active dialogue with each company, aiming to raise awareness of sustainability, to stimulate action and to create lasting positive change.
Triodos IM is an active shareholder and strongly believes in exercising voting rights to positively influence both the sustainability and financial performance of a company’s long-term strategy. This includes both regular dialogue with investee companies as well as the more formal processes voting at AGMs. In 2016, the research team had dialogue with a total of 215 companies on 467 occasions with a response rate of 91 per cent. Triodos IM voted at 109 shareholder meetings, particularly focusing on how to create equity regarding remuneration policies.
SRIs: a promising future
In 2017, Triodos IM will push forward its sustainable objectives in a number of areas, including board diversity, living wage and water scarcity. “It is imperative that we scale up impact investing,” says Rosl. “We need a paradigm shift in the investment industry, from mostly thinking in short-term financial gains to long-term investment, creating real value and adding to a better quality of life.”
“There is much reason for optimism. Time and again I am struck and inspired by the entrepreneurs who want to make a difference in this world. And also by the growing number of people who want to invest their money according to their values and who want to contribute to positive change.”
Follow the link for a Q&A with Co-Manager, Jon Forster, from Impax Environmental Markets plc.
Follow the link for a Q&A with Head of Research and Impact Reporting, Seb Below, from WHEB Asset Management.