Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

ESG integration — from portfolio to plate

What can 'Veganuary' teach us about sustainable investing and all its ingredients? 

I decided to do ‘Veganuary’ this year – adopting a vegan-only diet for the whole of January. Given that last year’s attempt at an alcohol-free ‘dry’ January was an utter failure, I didn’t have high hopes. But this time, while there were some minor breaches (which largely involved the inclusion of dairy in surprising products), I made it.

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It might surprise you to learn that a packet of crisps contains no fewer than 20 ingredients. It was also interesting to discover what was not contained in some products: prawn cocktail crisps and bacon frazzles are both vegan-friendly for example. The whole experience showed me that ingredients matter – a phrase that can be well applied to sustainable investing and all its variants.

Unlike the requirement for consumer brands to show what’s in the tin, no rule applies to investment managers when it comes to how they integrate sustainable investment (or don’t). This makes it difficult for investors and consultants to discriminate between managers seemingly offering the same ingredients, not to mention the many different styles – responsible investment, ethical investing, impact investing, socially-aware investment, and integrating environmental, social and governance (ESG) considerations into your portfolio, to name a few.

So what’s responsible investing about? In brief, it’s about seeking to protect long-term investment returns through the consideration of E, S and G considerations such as board remuneration or the disposal of waste. Dumping toxic waste into a nearby river could mean that nearby communities can no longer use it. This might result in a revocation of the social (and actual) license to operate – which carries financial risks.

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I can attest to the fact that I haven’t come across a firm without a voting policy or some version of a responsible investment policy. Investors are therefore required to dig a bit deeper. Whilst it isn’t best used in isolation, voting records can be a useful proxy for a manager’s approach to responsible investment. ‘Turning up’ is probably a good start here but, more than that, reviewing a manager’s annual voting behaviour can give a decent indication of what their priorities are.

Without delving too far into the myriad of styles, some of the hardest to understand are also the hardest to quantify. These are probably best suited to the intrepid explorer. To single one out for scrutiny, ethical standards are a moveable feast. Perhaps, however, this is a key component of all authentic responsible investment strategies: the ability to evolve the approach as we learn more.

The beauty of responsible investment is that, when done properly, it can create a virtuous circle. Ignoring the behavioural benefits of engagement, the more we engage the better disclosures and data should become. And all this just from asking the simple question: what are we eating?

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