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Responsible investing

Responsible investing policy

“We exist to improve the retirements of our millions of members and we simply cannot do this if we ignore the world they will be retiring into.”

Helen Dean, NEST Chief Executive

The philosophy of responsible investing

As an investment advisor, capital allocator and employer, we believe that ARP have the duty to carefully assess the implications of any potential investment, advice or other action we take, on the environment and society. We believe that our thematic focus, searching for investment opportunities which are driven by secular megatrends (e.g. climate change), provide an enhanced framework for delivering superior long-run risk-adjusted returns whilst complying with the standards of responsible investing that we have forced upon ourselves.

The intention is that our investment decisions, advice and other actions contribute to a positive net outcome from an environmental and/or social perspective in aggregate. This includes improvements from a less desirable starting point where there is a positive direction of travel. We are very cognisant of the fact that the assessment that needs to be undertaken is often complex, opaque and multi-faceted, and that a suitable infrastructure is required when making such assessments.  Furthermore, we need to be dynamic and adapt our policies as the effects on the environment and on society are better evidenced and understood.

We also believe that we have an important role to play in society, promoting positive change and collaborating with other organisations while continuously educating ourselves. This, in turn, will benefit our clients.  Finally, a frequent dialogue with our clients is a critical part of the process, as we decide what the next step in this journey should be.

What do we mean by responsible investing?

The terminology used in the investment industry when discussing “responsible investing” varies, including environmental, social and governance (ESG) investing, ethical investing, sustainable investing, socially responsible investing (SRI) and impact investing.  These terms are often used interchangeably, but we see each term as representing a specific shade within the “responsible investing” spectrum.

We place negative/exclusionary screening ESG investing on the least stringent end of the spectrum. On the most demanding end we place impact investing, as it requires a positive environmental and/or social outcome which is additional, intentional and measurable. We use the term “responsible investing” to describe the whole spectrum and to include both ethical and long-term sustainability aspects.

Least
stringent
Most
demanding
ESG
investing
Impact
investing

While we believe that impact investing is the most desirable outcome when investing responsibly, not all investments we make or advise on can be classified as impact investing. Limitations within the strategy, asset class and the risk/return profile will often dictate where an investment will lie within the “responsible investing” spectrum. Furthermore, we are receptive, within certain parameters, to the needs of our clients, who will all be at different stages of the journey.

Direction of travel

The intention is that our investment decisions, advice and other actions contribute to a positive net outcome from an environmental and social perspective. This includes improvements from a less desirable starting point where there is a positive direction of travel.  So, if we were to consider investing in a fund which has an exposure to carbon emitting companies, we would be comfortable investing in this fund if the investment manager can document that the company is taking material steps to reduce its carbon footprint.

Environmental and social considerations

When we refer to responsible investing, we only mention the effects on the environment and on society (the “E” and the “S” in ESG). Note the absence of the commonly used term governance (the “G”). This is because we feel that the term “society” implicitly refers to governance, as improvements in governance typically lead to improvements in society. Our social considerations therefore will also include elements of governance, such as executive pay and board diversity. Equally as important, we believe that the term “society” encompasses financial considerations such as income inequality.

Consideration examples

ENVIRONMENTAL:

  • Climate change
  • Resource depletion
  • Waste
  • Pollution
  • Deforestation

SOCIAL:

  • Human rights
  • Child labour
  • Working conditions
  • Modern Slavery

– Governance

  • Board diversity and structure
  • Bribery and corruption

– Financial

  • Income inequality
  • Access to finance

The complexity of the process, infrastructure and adaptability

The assessment of whether an investment should be considered responsible can be quite complex and multi-faceted, not to mention the significant limitations in the availability, quality and standardisation of data. To fully understand the environmental and social implications of a policy, strategy or technology utilised in an investment, an investor needs to consider the full life cycle, supply chain and other potentially unintended consequences.

Measuring the net impact of various effects, often in opposing directions and with limited data, is a daunting task.  As a result, investors may be forced to adapt their policies and views as the full effects on the environment and society become better understood and evidenced.

In some instances, investors may be required to make a subjective judgement; however, an attempt should always be made to make informed decisions based on the available evidence – not emotions. When we recommend a fund to our clients, it is therefore important that the fund manager has all the policies, resources and infrastructure in place to address those complexities.

Our proprietary Responsible Investing Questionnaire (“RIQ”) is sent to investment managers prior to making an allocation and on an annual basis once an investment has been made. Green and social washing is proliferating in asset management, and we want to make sure to avoid this.

At ARP, the Responsible Investing Committee (“RIC”) is responsible for the oversight of the firm’s set of policies on responsible investing. The RIC is chaired by the Head of Strategy and comprises of the CIO, COO and Head of Research. It meets whenever new capital is committed and at least quarterly. Our responsible investing policy, ratings and the RIQ are reviewed at least annually. The research team is responsible for determining the responsible investing ratings for each of the funds recommended to our clients and is responsible for highlighting any issues or concerns to the RIC.

While we believe adaptability is important when investing responsibly, we exclude investments in certain areas, e.g. weapons, tobacco and adult entertainment.

Thematic investing

Megatrends are secular forces that drive change in the world we live in. Our investment approach is thematic, and we have identified six megatrends that we believe will drive returns in the years to come:

  • The End of the Debt Supercycle
  • Changing Demographics
  • The Rising Gap between the Rich and Poor
  • Rise of the East
  • The Age of Disruption
  • Climate Change

Given the tailwind you create by investing in investment themes associated with those megatrends, we also believe that thematic investing reduces long-term risks in our clients’ portfolios.

ARP megatrends and Associated Investment Themes

1

Last Stages of the Debt Supercycle

Regulatory arbitrage
Currency wars (aka QE)
Out-of-control public deficits

2

Changing Demographics

Demise of the Anglo-Saxon growth model
Retirement of the baby boomers
The rise of millennials
From globalisation to localisation
The digital revolution
Currency wars (aka QE)
Out-of-control public deficits

3

The Rising Gap between Rich and Poor

The rise populism
Declining spending power of the middle classes
Currency wars (aka QE)
Out-of-control public deficits

4

Rise of the East

Urbanisation
The rising demand for natural resources
Running out of fresh water
The digital revolution
Currency wars (aka QE)

5

The Era of Disruption

The rise of populism
Urbanisation
Electrification of everything
From globalisation to localisation
The digital revolution
The death of fossil fuels

6

Climate Change

Running our of fresh water
The death of fossil fuels
Electrification of everything
From globalisation to localisation
The digital revolution
Out-of-control public deficits

When examining each of those megatrends and associated investment themes more closely, it becomes apparent that a large number of these are closely related to the United Nations Sustainable Developments Goals (SDGs). We believe therefore that a thematic focus provides an enhanced framework for making responsible investment decisions while delivering superior long-term risk-adjusted returns.

Last Stages of the Debt Supercycle

Changing Demographics

The Rising Gap between Rich and Poor

Rise of the East

The Era of Disruption

Climate Change

Integrated implementation

When assessing the implications of any potential investment on the environment and our society, our research team conducts the work as an integrated part of its due diligence (DD).  Should there be any concerns, these are raised by the research team to the RIC.

As part of our investment and operational DD, we send our Responsible Investing Questionnaire (RIQ) to the investment manager. The DD meetings we have with the investment manager plus the answers provided to the RIQ will result in a responsible Investing Rating and an Impact Rating, both of which are reviewed annually.

Core areas of the RIQ

We incorporate responsible investing slightly differently from asset class to asset class and from investment strategy to investment strategy- each one presenting a number of opportunities as well as challenges (e.g. different levels of transparency and engagement).

When dealing with listed equities, we request transparency into our investment managers’ engagement activities, including regular proxy voting, engagement reports and whether they are supporters of any stewardship code or similar group.

In private markets, there is arguably a longer way to go in terms of best practice to ensure consistency and quality of reporting across the industry. Nevertheless, there are typically additional avenues open to the investment manager to have a positive impact. Across all asset classes and strategies, where possible, we actively promote increased transparency and positive change.

Promoting change, collaboration and education

As a UN PRI signatory since 2018, we are committed to implementing the six principles for responsible investment across our organisation. We are keen to participate in the initiatives of UN PRI and also to collaborate with other organisations and investors to promote positive environmental and social outcomes.

In order to keep up to date as to the latest developments and best practice in the space, we regularly attend events on the topic of responsible investing. We also undergo formal training, such as attending courses provided by PRI’s academy.

ARP’s role as an employer and in the local community

We also believe in being a responsible employer from the beginning to the end of employees’ and partners’ time at ARP. We are in the process of strengthening our existing policies and adding new policies where necessary. In the recruiting process, we aim for equal opportunities and treatment for all, a respect for diversity (e.g. gender, race, background) and selection based on merit. It is the intention that promotions within our firm follow the same ethical and procedural fairness. Gender equality is important to us, and we aim to revisit our policies to ensure for instance that there is supportive maternity and paternity cover and that there is no gender pay gap on an apples-to-apples basis.

We also aim to contribute to our local community. We donate to charities in Richmond, where we are based, and we aim to donate to charities related to some of the megatrends that drive our investments. In addition, once a year, we take a day off to do voluntary work to contribute to our local community.

Reporting

We are working towards providing annual reports to our clients, covering their investments from a responsible investment angle. Any ad-hoc events deemed material will also be included in our quarterly client reports.

Furthermore, we believe in providing transparency of our own policy programme, and the new annual report will include details as to how we comply with the standards we expect from others.

Finally, given the dynamic and evolving nature of the space, we are committed to continued innovation and improvement, adapting this policy accordingly.

ARP Investment Principle #2

When investing, we always try to think of the wider implications and aim to invest responsibly. Having said that, many labels are used when talking about responsible investing. Some call it sustainable investing, whereas others use the term “ESG” (Environmental, social and governance) investing. We prefer to call it responsible investing.

All those terms mean something slightly differently but, at the end of the day, it is all about acting responsibly when investing. Consequently, we are members of the United Nations’ PRI (Principles for Responsible Investment) and follow PRI’s guidelines.

Whether one subscribes to one or the other term, it is a rapidly growing trend; an art which is no longer reserved for the world’s largest pension funds (who were early trendsetters). Today, even smaller private investors pay attention, meaning that it has become a proper alpha instrument rather than just a way to demonstrate political correctness.