Posted on: March 4th, 2013
Rarely a week goes by when there is not some issue or another in the press that relates very clearly to the strategies adopted by Sustainable and Responsible or ethical funds. Last week was no exception.
A high profile report co-authored by Dr Rory Sullivan, who some advisers may remember from his days at CleriMed/Insight AM, was a good example (see FT fm 25 February 2013). Working alongside CIWF (Compassion in World Farming) the authors set up a ‘Business Benchmark on Farm Animal Welfare’. The report is timely because of the ongoing horsemeat saga which is pushing the sale of some products down and public concern up – and therefore putting the spotlight on the food industry.
So is this relevant to financial advisers? Put bluntly – yes. The problem is that there are a number of issues at play and different people will care about different things. An adviser’s role is therefore, if you’ll excuse the pun, to sort through the wheat from the chaff… and work out which aspects are relevant to which clients.
As I see it the ‘relevant issues’ can be sorted into three main areas:
Taking each in turn;
With regard to public health and food safety – there appears to be a consensus that the fraudulent use of horsemeat, whilst undesirable, poses minimal health risks. This is good news of course. Yet ‘high impact low probability’ risks still need to be managed (ask BP)! The scandal raises concerns such as ‘what else might be going on that we are unaware of’ and ‘how can we be sure food is safe if we don’t know what’s in it? Such questions are, in my view, legitimate and will hopefully be addressed by the food industry over the coming months. This in turn may have cost implications for the businesses involved – and could feed through to profitability and investor returns if not dealt with swiftly.
With regard to animal welfare… this is a complex issue and has been rather sidelined over recent years. One of the challenges of the ‘animal welfare’ agenda is that it can be confused with ‘animal rights’, its more controversial (and rather harder for investors to support) sibling. The ethical investment community is however pretty well equipped to deal with animal welfare concerns and options exist for investors who want to support companies with higher standards, or avoid certain areas.
The high level of business and media attention given to the horsemeat issue and the BBFAW benchmarking study should both help focus additional attention on animal welfare in the months ahead. This means there is likely to be additional pressure on companies to make progress on such issues (Sainsbury’s, the Co-Op and Waitrose are examples of where progress is already being made). There is also likely to be pressure on companies to make more information available to the public via consumer websites (the report lists Marks and Spencer, McDonald’s, and Tesco as already doing this).
To my mind however, the biggest issue is the third, supply chain management and traceability. This is not entirely separate from the first two areas, but is worthy of individual consideration. The fact horsemeat has been found in a number of products (including school meals) implies a systemic problem. However ‘safe’ or ‘decent’, a supply chain which allows non-traceable foodstuff to seep in is a major concern to all involved (even if the problem is one of fraud). It risks denting trust, damaging reputations, impacting sales and where relevant, could significantly impact shareholder value if not dealt with properly. It may be that no single company can solve this issue alone and that regulatory and other changes may be required but that is not an excuse for inaction. As such major investors should be looking for reassurance – and where necessary, progress.
According to one major fund manager food safety has been an area of concern to them for a while. As a result they have been working closely with a major supermarket for some time – and now plan to expand the program to others.
Supply chain management has been an SRI issue for many years. Some major investors cut their teeth on issues such as human rights and labour standards related supply chain issues many years ago (remember Nike and those footballs?) As such some fund managers are better placed than others to react constructively and usefully ‘engage’ with investee companies.
Engagement aside, it is also useful for advisers to remember that there are many people who are opposed to investing in the meat industry and supermarkets for personal, ‘values based’ reasons. According to the ‘BBC Health’ website there are an estimated £3 million people in the UK are vegetarian and there is growing evidence of many more who are reducing their meat consumption for sustainability reasons. A scandal such as this is likely to bring their views to the fore. Discussing this area with such clients would therefore be valuable (ideally starting at the fact find stage) and should help shape a strong adviser/client relationship.
The investment world does not have a reputation for leading on issues such as this, so you can probably surmise that when reports start to fly and engagement is ‘on the up’ both public concern and business risks are probably increasing.
My suggestion for advisers… like anything else, some clients will be interested in this area and others won’t. So whether you are personally horrified by what you have read on this scandal or are happy to crack jokes about Shergar it is your clients views that need to drive your research in this area – not your own. And this means asking relevant questions of your clients.
This may present an opportunity to discuss something different with a client as it can open up investment opportunities and help build trust (or failing that – the opposite may apply). You do however need to be mindful that clients’ views are personal and cannot always be matched precisely with investment options. (Remembering that it is better to be aware of a client’s views and to do what you can to meet their needs than to risk ignoring something that is important to a client).
For some clients there may be a number of ethical funds that reflect their views (as most have animal welfare policies). For others, themed sustainability funds may make more sense as many consider a range of ‘food issues’. For some it may be a case of identifying mainstream options where ‘responsible engagement’ policies apply that may lead to engagement to encourage change.
In practice this may require a phone call or two, but the Fund EcoMarket SRI database (and fact finding tools) should be a useful starting point. Fund EcoMarket splits funds into different SRI styles as identified by sriServices and explained in our ‘SRI styles directory’ . You may like to try out the Fund EcoMarket and Panacea Fund EcoMarket database tool to help identify funds that may be relevant to your clients. These tools, the links below and the related adviser support material www.sriServices.co.uk will all help you to demonstrate the benefits of seeking personalised financial advice.
Director, sriServices.co.uk and Fund EcoMarket
4 March 2013