Sustainable investing for a changing world

The trade-off between risk and return is well understood by investors. Sustainability is the third dimension, a forward looking holistic approach to investment.

Plastic phase-out: which companies will be most affected?

Our latest research looks at some of the potential winners and losers from the war on plastic.

The use of plastics has come under intense scrutiny in recent months.  Prompted by headlines like “More plastic than fish in the oceans by 20501” and “UN commits to stop ocean plastic waste2”, consumers and regulators have turned their attention to an issue that has escaped mainstream focus until recently. Concerns regarding plastics are well past a tipping point of public concern and regulatory action.

Plastics manufacturers most at risk

The impacts to date have been relatively modest and focused on narrow areas. While individual plastic products have found themselves in the limelight, the issue spreads much further than carrier bags, micro beads or straws.

We apply a broader lens to the wider plastics landscape, assessing the areas of consumer packaging likely to face the most pressure, the companies that supply those products and the raw materials they contain.

While consumer companies have been most visibly affected by the increased attention, the impacts elsewhere in plastics value chains – among packaging companies and raw material suppliers – are likely to be more intense and disruptive. We have looked through that value chain to assess potential risks, the companies exposed to them and the steps some leaders are taking. We expect the biggest impacts to be felt by manufacturers of plastic packaging.

  • Consumer companies will need to reduce plastics use by substituting single use plastics for alternative materials or redesigning or reducing packaging. A long list of companies has already announced plans to change their approaches to packaging use. For instance, Costa Coffee owner Whitbread has launched a nationwide recycling scheme, Coca-Cola has committed to collect and recycle the equivalent of all its packaging in Western Europe by 2030 and McDonald’s plans to make all of its packaging renewable or recyclable by 2025. There will be costs to retooling equipment, reconfiguring supply chains and in some cases higher materials costs. However, our analysis shows that companies already adapting to these trends may benefit. Cost savings achieved by lower packaging use, improved consumer perceptions and reduced regulatory risks could contribute to higher margins for food producers and household & personal product companies. We find that soft drinks companies carrying on with business-as-usual face the biggest downside risks.
  • Packaging companies face bigger challenges. Currently, 37% of consumer packaging is plastic3, the outlook for which is clearly challenged. On the other hand, leaders that are able to develop sustainable alternatives – like bioplastics or improved recyclability – will emerge from these challenges stronger. They should be able to establish distinctive products for which they have pricing leverage, replacing their current reliance on traditional commodity plastics categories. While some major players are already directing their innovation efforts to developing more sustainable packaging, we believe that innovation is too slow to allow the industry as a whole to pivot away from traditional plastics undamaged. Our analysis of the operating profit exposures of individual packaging companies highlights the value of leadership, with well-placed companies suffering little impact and laggards seeing up to one-third of earnings at risk.
  • Chemicals companies are starting to develop compostable, bio-based plastics as well as different types of polymers that can achieve reductions in material use. Bioplastics and compostable materials are starting to gain traction. The bioplastic market is set to grow at a 30% compound annual growth rate to 2030 (from 2013), compared to an average of 3% growth for fossil-based plastic4. They have their flaws: they can be hard to recycle, more expensive to make, and not yet available in large quantities, but improvements in cellulose conversion technology are expected to enhance the quality, quantity and cost. As manufacturers face pressure from their consumer-facing customers, the more innovative companies should gain market share. Most of those beneficiaries appear likely to emerge from the current industry leaders.
  • Waste utility and recycling companies are likely to benefit from growing demand for end-of-life recycling and reuse. Recent Chinese waste import restrictions, coupled with increased political and regulatory pressure on plastic waste, create a potential springboard for the recycling industry. New geographies, new applications and new products could lead to market growth of 7-9%. Picking out winners from a fragmented, highly competitive industry is challenging and we think localised solutions will be key.
  • Oil is the main raw material used in plastics production. However, 4-8% of global oil production is used to make plastic5, of which an estimated half is used for packaging. As a result, the impact on that market is likely to be modest, although the issue unhelpfully compounds the wider challenges facing the energy sector.

Single use plastics have become ubiquitous in today’s consumer product industries and value chains. We expect pressures to spread from the specific niches on which attention has focused so far, to the wider range of products contributing to a global environmental challenge that has begun to move from ecological concern to economic driver.


1 G. Wearden, “More plastic than fish in the sea by 2050, says Ellen MacArthur”, The Guardian, January 2016
2 R. Harrabin, “UN commits to stop ocean plastic waste”, BBC News, December 2017
3 Unwrapping the Packaging Industry, EY, 2013
4 “Global Bioplastics Market Predicted To Grow 350%”, Energy and Gold, March 2016
5 New Plastics Economy: Rethinking the Future, Ellen MacArthur Foundation, December 2017

 

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This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Opinions stated are matters of judgment, which may change. Information herein is believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
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Our business is structured around a number of strategic capabilities, which combine to meet a variety of client requirements. Please visit the Strategic Capabilities - Sustainability page to discover how we sustainably deliver long-term value in a fast-changing world.

Social and environmental change is happening faster than ever. The challenges posed by climate change, inequality and demographics are sizeable. Those companies able to adapt and thrive will continue to benefit disproportionately, while others will fall further behind.

For fund managers navigating this backdrop to deliver value is a challenge. Our answer to this is sustainable investing. We focus on identifying sustainably managed businesses, understanding the risks and opportunities of environmental and social change, and actively engaging to improve companies behaviours and governance. At Schroders this is how we believe we can create real long-term value for our clients.

Our experience and expertise

 

Source: Schroders, as at 31 December 2017
PRI, 2015, 2016 and 2017 Assessment Reports.
2 ShareAction, "Lifting the Lid: Responsible Investment Performance of European Asset Managers", March 2017. 
3 Asset Owners Disclosure Project, "Global Climate Index 2017“, April 2017.
Financial Reporting Council 2016 Assessment

 

Companies at the centre of analysis

Companies are at the centre of the framework and we monitor their abilities to navigate the social and environmental trends in their industries. This understanding is key to analysing a company’s effective ownership and management for us to see the company as a good long term investment. ESG analysis is unlikely to present a performance signal in isolation, but as part of an integrated view of a company it can be compelling.

Source: Schroders.

 

ESG engagement

As an active manager, company engagement happens on a daily basis across Schroders. The aim of our engagement is threefold:

  1. To encourage companies to adopt longer-term approaches to their stakeholder relationships;
  2. To improve investment insights on emerging risks and opportunities; and
  3. To generate better returns.

Source: Schroders, as at 31 December 2017. Governance engagements are included from 2014 onwards.

 

Find out more

Please visit the Integrity page to discover how we uncover long-term potential, together with our ESG policies.

Also check out the Influence page to see how we use our vote to act in your best interest.

Please visit the Insights page to explore our investment insights through a sustainability lens.

Knowing what to do with insights is the key that unlocks value for you. Find out how our analysis applies in practice from the Interpret page.

Our business is structured around a number of strategic capabilities, which combine to meet a variety of client requirements. Please visit the Strategic Capabilities - Sustainability page to discover how we sustainably deliver long-term value in a fast-changing world.

Until a decade ago, environmental and social considerations did not really register in the investment industry outside niche ethical or green corners.

The UN Principles for Responsible Investment which were launched in 2006 kick started a change and required investors to consider ESG factors as part of their investment decisions, ownership, engagement and reporting.

Over a decade the PRI has gone from launch to counting over nine in every ten of the largest fund managers in the world as signatories.

Schroders have been conducting business in this way long before the principles were launch due to our strong ESG convictions, beliefs and as part of ingrained investment approach. We became a signatory in 2007.

ESG Trend:  It’s important to other asset owners too

Source: PRI Web-site, as at 30 April 2017.

 

ESG has moved from niche to mainstream

Interest, demand and sophistication are on the rise

Source: Hightail (news search for articles containing “sustainable investing” relative to all articles referring to “investing”, Principles for Responsible investment (number of signatories) and EuroSIF (combined AUM invested in different ESG strategies, adjusted for double-counting).

 

Global ESG assets by region

Source: ‘2016 Global Sustainable Investment Review’, Global Sustainable Investment Alliance (GSIA),*Proportion of SRI assets relative to total managed assets. Survey done every two years.

 

Evolution by strategy

Source: 2016 Global Sustainable Investment Review, Global Sustainable Investment Alliance, GSIA. Survey done every two years.

 

Find out more

Please also check out the brochure where we layout Schroders’ view on the landscape of activities, strategies that fall under the broad umbrella of ESG and sustainability, and our assessment of the terms most commonly associated with each.

Our business is structured around a number of strategic capabilities, which combine to meet a variety of client requirements. Please visit the Strategic Capabilities - Sustainability page to discover how we sustainably deliver long-term value in a fast-changing world.

Sustainable investing has, in recent years, become more important to people who invest around the globe. But there is still some way to go before the majority recognise sustainable investing as an effective means of having a positive impact on the world.

This is one of the overarching takeaways from our Global Investor Study 2017, in which we spoke to more than 22,000 people who invest from 30 markets worldwide.

The trends identified indicate that investments in sustainable funds will continue to grow. Further growth can be encouraged by closing the current knowledge gap around how these types of investments can achieve both potential profit and positive impact.

Sustainability is no longer an obscure investment consideration. 87% of people who invest in Hong Kong have some idea of what sustainable investing is. But their understanding varies.

Source: Schroders Global Investor Study 2017

Perceptions in Hong Kong are shifting, with many becoming more mindful of sustainable investing. 84% of investors in Hong Kong say that sustainable investing has become more important to them in the past five years. The increased awareness has led to more people investing sustainably.

Source: Schroders Global Investor Survey 2017

At least half of people in Hong Kong contribute to a more sustainable society in one way or another.

Source: Schroders Global Investor Survey 2017

The relative balance in motivations suggests people in Hong Kong are aware that sustainable investing can be a means of achieving both positive impact and better profits.

Source: Schroders Global Investor Survey 2017

 

Find out more

Our business is structured around a number of strategic capabilities, which combine to meet a variety of client requirements. Please visit the Strategic Capabilities - Sustainability page to discover how we sustainably deliver long-term value in a fast-changing world.

Experts from Schroders discussed why there is more to ESG investing than tracking a sustainability index, and why ESG is about navigating future forward change in an article for the publication Asia Asset Management.  Jessica Ground, Global Head of Stewardship, and Chris Durack, Chief Executive Officer, Hong Kong & Head of Institutional Business, Asia Pacific for Schroders give their views and opinions on the topic.

Navigating future forward change

A+1 UN PRI-rated Schroders explains why there is more to ESG investing than tracking a sustainability index

Schroders believes sustainable investing is all about allocating capital for the future.

As Environmental, Social and Corporate Governance (ESG) moves up investors’ agenda, there is a growing trend in the industry towards products that track a sustainability index.

But Jessica Ground, Global Head of Stewardship at Schroders, thinks an active approach is needed to capture the benefits of ESG investing.

She explains that ESG investing is incredibly complex, for example, incorporating climate change into an investment strategy has many different aspects ranging from governments’ responses to climate change, to how consumers may modify their own behaviour.

“It is very hard to do this passively,” she says.

Ms. Ground thinks another issue with ESG indexes is that they tend to be quite backwards looking, based on historic data.

“ESG is really about navigating future forward change. It can’t necessarily be distilled in a passive approach,” she says.

She also points out that while the quality of ESG data is improving, it is still not systematically at the same level as other investment data, for example 40% of carbon data is estimated.

“Some of the passive strategies have been low carbon strategies. But if you have a passive approach on imperfect information, it is not a great outcome,” she says.

By contrast, Schroders takes a very active approach to its ESG investment process.

Holding companies to account

Ms. Ground explains that while around 8.6% of the assets the group manages have some kind of ethical exclusion, such as not putting money into tobacco companies, Schroders has 20-plus years of firm-wide experience of ESG integration, and this is the investment strategy it pursues for the vast majority of its clients.

“We see our job as allocating capital for the future and we really believe that in doing that we need to understand how the world is going to change.

“ESG provides us with tools that help us think about the future and it helps us assess which companies are best placed to navigate that,” she says.

Schroders has 11 dedicated ESG specialists, who work with more than 200 equity and credit analysts across its global locations2.

Ms. Ground says such an approach can definitely generate alpha.

Schroder’s ESG strategy goes further than just picking companies that look likely to benefit from future changes.

“The other area of ESG that is very important to us is the idea of holding companies to account,” Ms. Ground says.

“We as shareholders can engage companies to get improvements, and we have a really powerful seat at the table to get change on ESG issues.”

In fact, Schroders had more than 760 engagements with companies in 2016 alone, while it voted in more than 5,160 company meetings during the year.

Nor does Ms. Ground think investors have to sacrifice performance for their principles.

“There is a great body of academic evidence that looks at this issue.

Companies that have good governance tend to have much more resilient operational performance in the profits,” she says.

“What is interesting is that also gets recognised by the capital markets, so they have lower costs of debt borrowing and equity.”

Why bother engaging with companies?

Successful engagements have benefitted holdings

Source: Dimson, Karakas and Li (2015). Fama-French size decile returns from Professor French’s website.

Sustainability as risk management

Responsible investing can also be a good tool for managing risk and safeguarding investments.

Ms. Ground gives the example of a piece of research carried out by Schroders in which three catalysts are identified that could result in sugar causing Big Food to become the next Big Tobacco.

She points out that over consumption of sugar is leading to obesity, heart disease and diabetes. There is a rising awareness of this issue among consumers and governments, which creates an ongoing headwind for companies.

As a result, these firms could face lower sales growth and pressure on profit margins as they have to increase research and development investment.

But certain firms, such as those that have already invested heavily in R&D and implemented nutritional profiling across their product portfolio, are better placed to increase their market share and become market leaders.

Ms. Ground says: “Through the research, we really identified winners and losers, with some companies already addressing the issue, but other companies lagging.”

The research also looked at the fact that sugar in the US is labelled in more than 40 different ways, and given that the US is a litigious society and has an obesity problem, there were likely to be legal cases against food companies.

Ms. Ground says that when accounting for potential litigation costs, lower sales growth and increased research and development investment, the impact on financials over the medium-term could be material.

“We identified a different risk. The first aspect, talking about declining consumption and margin trends, appealed to our equity investors, but the previously unidentified litigation risk appealed to our debt investors, who were able to position portfolios around it.

“You can see from that initial work there are multiple ways that we can generate alpha from this.”

Ms. Ground points out that realistically, with more than half a trillion dollars of assets under management worldwide, Schroders was always going to have some exposure to issues such as the one relating to sugar.

But on the back of the research it has organised round tables with companies to discuss the issue and how they might disclose better on the sugar content in their portfolios, and make progress on the issue.

“We can really start to monitor and make sure they are doing something and taking it seriously,” she says.

“It is about managing these risks in a way that can benefit portfolios.”

What gets monitored gets managed

Ms. Ground advises companies that want to score highly on the sustainability front to focus on the material issues for their company.

“What are the most important stakeholder relationships and how can you get them on to a sustainable footing.

“Make sure you are forward looking and really thinking about how our world is changing, and moving ahead of that.”

“We know people are taking them seriously when they also put KPIs around them and monitor them.

“It is the adage what gets monitored gets managed,” she says.

But Ms. Ground adds that the targets had to make sense for the business.

“If you are an oil and gas company are you monitoring your carbon emissions and expecting carbon to get taxed?

“That is incredibly important and there is a real difference to saying we care about the environment, and this is how we are reducing our carbon footprint,” she says.

Endowments lead the way

Schroders has found that globally ESG is particularly high up the agenda of endowments.

“We see endowments leading the way and a lot of them really wanting to align their mission with how they are investing. They see their investments as an extension of this,” Ms. Ground says.

Many sovereign wealth funds also place an emphasis on ESG as they think about the long-term sustainability of the world as major asset owners, while there is also increasing interest from pension funds.

Ms. Ground explains that this interest comes from the fact that younger investors feel very strongly about sustainability issues and ask more questions about them.

At the same time, millennials are starting to work in pension funds themselves and they are focused on creating change.

Growing opportunities in Asia

Ms. Ground says data showed there was also a high interest in ESG investing in Asia, particularly among young people.

A global survey found that 59% of millennials in Asia thought the issue of climate change was very pressing, compared with just 30% in North America.

“I wouldn’t be surprised if Asia leap frogged other regions in terms of ESG investing,” Ms. Ground says.

“Asia has less history in this area but because things are changing so quickly, they can start with a more innovative approach, not just having polices but setting targets and measuring things.”

She adds that policymakers in Asia were encouraging engagement with ESG issues, and there was a rise of stewardship codes in Taiwan, Singapore and Hong Kong.

Ms. Ground thinks Asia is also well positioned to learn from the mistakes of other regions.

She says in Europe there have been cases of green washing, where companies had put ESG policies in place but not really done anything else.

In other cases, investors had excluded coal companies from their portfolios, but this had not actually led to a reduction in the number of coal mines in operation.

She says: “Let’s learn from the mistakes and move away from the green washing and just look at how as a pension fund you can really invest in a more sustainable way, and how as a business owner you can create a really long term sustainable business that is going to last.

“There is a ground swell of opportunity.”

Chris Durack, Chief Executive Officer, Hong Kong & Head of Institutional Business, Asia Pacific, at Schroders, says: “As an active fund manager committed to fundamental research we have the benefit of understanding that companies’ futures are intrinsically linked to the environment in which they operate.”

“We are looking to use our combined resources and experience to gain better insights from how we link a view of social and environmental change to company analysis and investment decisions.”

“While parts of the industry are still asking whether ESG factors can affect performance, we have moved forward and are focusing on how to define and measure ESG factors to maximise their benefit for our clients.”


1 Rating for overall approach to responsible investment in the PRI 2016 assessment
2 Data as at March 31, 2017

Important Information: This document is intended to be for information purposes only and does not constitute any solicitation and offering of investment products. Investment involves risks. This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.

Source: Asia Asset Management July 2017

 

Find out more

Sustainable investing is growing in popularity, but many misconceptions remain. We have the myths debunked for you, please click here to find out.

Please also visit the Insights page to explore our investment insights through a sustainability lens.

Our business is structured around a number of strategic capabilities, which combine to meet a variety of client requirements. Please visit the Strategic Capabilities - Sustainability page to discover how we sustainably deliver long-term value in a fast-changing world.