The UK market continues to present both challenges and opportunities for ESG investors. When the first Equity ESG funds were launched in the mid and late 1980s, critics were quick to point out the limited investment universe. The first ESG UK fund was
labelled the Brazil fund with the tag line “you would have to be nuts to invest in it”. The number of listed securities in the UK has been on a steep decline since the 1960s, from 4000 to 1500 names on the London Stock Exchange (LSE) with
another 1000 on AIM by the early 2000s. The number today appears to have recovered, but out of the 4500 equity instruments on the LSE, 2400 are exchange traded funds (ETFs). The challenge for active ESG UK fund managers is best highlighted by the
fact that the number of members of the FTSE All-Share Index in the 1990s was nearly 900, but today stands at fewer than 600. This has in turn intensified the debate on active vs passive ESG investing.
Active vs Passive
Active ESG managers have come under enormous pressure in recent years on both performance and fees. The former has been particularly painful in 2022 for ESG investors with elevated inflation, supply chain issues and the conflict in Ukraine, all leading
to capital moving into those areas of the market which are not usually available to ESG investors – Oil & Gas, Mining, Defence and Tobacco. The shift to passive solutions has moved beyond 50% in the US and shows little signs of letting up
across all developed markets. The ESG landscape is now facing the same assault from passive solutions across all asset classes. Whilst passives have a role to play in markets, EdenTree remains a strong proponent of active management and we would argue
that the only way to deliver ESG investing is through an actively managed approach. There are two key areas where active managers deliver – voting and engagement, and this usually has no extra cost attached, an important distinction at a time
when investors are very cost conscious.
Governance is one of EdenTree’s four core pillars, along with research, screening and engagement, that support our approach to responsible and sustainable investment. Governance, at its simplest, entails exercising our right to vote at company meetings.
When shares are bought in a company, our clients become part owners in the business with rights and responsibilities. Shareholders are encouraged to be active owners in the companies in which they invest so that they are operated and managed to the
highest standards. It is the duty of executives to manage, and for the Board to oversee the management, but the Board is ultimately accountable to the owners – you the client! The most obvious way these rights as shareholders are exercised is
through voting at company meetings. Proxy voting is the most visible means of influencing corporate behaviour, but many passive strategies will have a natural cut-off below which they will not vote; EdenTree votes at all meetings in all markets and
the record is made available online on a quarterly basis.
As active fund managers, engaging with investee companies is at the core of our offering and can result in real-world impacts. At EdenTree, we form constructive long-term relationships with the companies in which we invest and continue to engage with
them long after we have invested as part of an ongoing monitoring programme. In the past three decades of engaging with companies in our portfolios it has proved a powerful way of improving a range of environmental, social and governance topics. One
example is Hawaiian Electric, the main provider of electricity in Hawaii, who we’ve been engaging with for over five years on climate change, encouraging both their participation in the CDP disclosure survey, as well as the setting of a science-based
target. The longevity of our efforts enabled us to build a strong relationship with the company, holding annual meetings where we challenged their disclosure and suggested avenues for improvement. In 2022, the company disclosed to the CDP for the
first time and signalled their intention to set a Science Based Target. Though credit for these actions deservedly lies with Hawaiian Electric, it does demonstrate the influence that active investors can have through long-term, committed engagement.
Another area where EdenTree have sought to drive change is river health. Following decades of poor environmental performance by UK water utility companies, we carried out a thematic engagement with eight English and Welsh water utility companies on the
topic of river quality and pollution management. Calls were held with Thames Water, Yorkshire Water, United Utilities, Dwr Cymru (Welsh Water), Severn Trent, Pennon (South West Water), Anglian Water and Southern Water. We believe it is an issue of
huge importance, but one that has been mostly off the radar for ESG and mainstream investors. We wanted to explore what we could do, and how we could drive change on a subject that appears unduly neglected by the capital markets. All the companies
we spoke to welcomed our efforts to lobby for change, and we’ve formed strong relationships which have already yielded a second set of conversations which occurred early this year.
The only way is active
The motivation to move to passive investments has been led by lower fees and this has reverberated across active management as well, with fees coming down markedly. The lower fee regime is a positive for all investors, however it is still the case that
you have to pay for quality. Active ESG managers have lowered their fees in recent years, whilst still providing voting and engagement at no extra cost. EdenTree have been leading on both for over 35 years with a focus on delivering performance with
principles for clients.
Ketan Patel, CFA
The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest. The value of an investment and the income from it can fall as well as rise, you may not get back the amount originally invested. Past
performance should not be seen as a guide to future performance. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.