By Audrey Ryan, manager of the Kames Ethical Equity Fund
Later this month we celebrate the 30 year anniversary of the Kames Ethical Equity Fund. Many things have changed and evolved over the past three decades, perhaps none more so than the advances in technology which have had effects on most consumers, businesses and industries. One thing that hasn’t changed however is our commitment and consistency of approach to responsible investing; consistently building out the range of products that we provide to investors, the most recent of which, the Kames Global Sustainable Equity Fund, will be three years old this month.
Responsible investing and active management
For Kames, responsible investing involves active management and engagement: active management is ESG management. Our client-led exclusions and regular interaction with clients keeps our ethical products relevant in an ever evolving industry. Active management across our fund range and a focus on the bottom-up stock-picking also allows access to many attractive growth businesses, specifically within the mid cap arena.
Investing responsibly and ESG in general has rightly moved up the agenda for many whether they be fund providers or clients. New fund launches have been notable as has the rebadging of existing products in the ESG and Sustainability themed space.
Looking under the bonnet
Interestingly there were reportedly 66 new ESG passive funds launched in 2018, taking the total to 205!. More product choice for the end investor is a good thing. However, it is key that investors understand what they are investing in and we would argue that exploring what is ‘under the bonnet’ of all funds is a must. Passive funds, for example, often rely on third party ratings agencies to screen for ‘good’ and ‘bad’ ESG stocks and while we fully acknowledge the benefits of ESG ratings agencies for our own research purposes, as we incorporate their work into our quantitative screens and bottom up research process, we are equally aware of some of their limitations. These include questions around the limited (or no) assessment of actual product impact; poor, inconsistent and self-reported ESG data quality, and the danger of the cookie cutter approach of ratings whereby every company is different but treated the same. We also have concerns around ratings’ large cap bias where small or mid-sized companies are not covered or often harshly treated, the geographic bias where emerging market companies are not considered, as well as the inherent backward looking nature of data, whereby a leopard can never change its spots! Investing sustainably inherently means looking to the future!
The human touch
As active investors we invest in businesses and the management teams that run them. Our fundamental analysis ensures we fully understand the businesses we back, and our own ESG work deepens our knowledge and strengthens our conviction. Then once invested we take our stewardship responsibilities very seriously. We communicate regularly with Board members and management teams and are always willing to challenge them when appropriate; whether it be on strategy or ESG issues. Where issues cannot be resolved we as active managers can sell the shares. Holding companies to account directly is somewhat more challenging for passive funds!
We have been a champion in the space for 30 years and continue to leverage our experience and commitment – here’s to the next 30 years!
Manager of The Kames Ethical Equity Fund