3 November 2020

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We live in an unsettled world where climate action failure, global governance failure and social instability are viewed as three of the most interconnected global risks1 that we face. The threat of these and many other risks are being increasingly felt as the window of time to combat their consequences gets shorter.

World Shapers: the extraordinary power

of ordinary investors

The COVID-19 pandemic is leaving a global economic slowdown in its wake, climate indicators are triggering alarm bells, and the geopolitical landscape has become fragmented at a time when global coordination is needed most. This might sound rather gloomy, but progress is being made - frameworks like the UN Sustainable Development Goals have been increasingly adopted by policy makers and companies, and economic superpowers are promoting sustainability in their COVID-19 recovery packages. Civic action on key issues such as the climate crisis, inequality and discrimination are also increasing in both scale and influence across the globe.

These actions are positive in terms of recognising risks but, when considering the future, there is one group of often-overlooked stakeholders who can be instrumental when it comes to effecting change: ordinary investors.

There is a growing realisation that there isn’t much point in investing if that future isn’t going to be a safe, stable and sustainable one. Where we choose to invest our money is one of the most powerful ways to make a difference. Having begun to integrate sustainability into many other aspects of their lives (for example by increasing recycling, switching to renewable energy suppliers or shopping with brands viewed as ethical), more investors are looking at reflecting these same values in their financial investments.

Responsible investment provides the opportunity to achieve financial returns and integrate sustainability values while, at the same time, uniting with other investors around the world to become a powerful force for change. As well as financial factors, environmental, social and governance (ESG) factors are considered when analysing investments, and emphasis is given to those businesses that are integrally linked to finding the solutions to global challenges.

There are two main ways in which investors can influence businesses around the world in their response to the sustainability challenges that we face: redirecting capital and active engagement.

Redirecting capital

Investors can influence companies by controlling and redirecting flows of capital. This could be achieved by choosing to avoid investing in certain industries or companies, either purely because they don’t align with certain sustainability values, or because the financial risks to these businesses of not adopting a sustainable approach are also recognised. For example, avoiding companies with poor management of their negative environmental impact reduces the risk of being exposed to regulatory fines, increasing tax burdens (should governments look to make businesses pay for their negative impacts) and reputational damage.

1. World Economic Forum Global Risks Perception Survey 2019-2020: http://www3.weforum.org/docs/WEF_Global_Risk_Report_2020.pdf

2. 2019 Edelman Trust Barometer Special Report: In Brands We Trust?: https://www.edelman.com/sites/g/files/aatuss191/files/2020-03/2020%20Edelman%20Trust%20Barometer%20Brands%20and%20the%20Coronavirus.pdf

3. Climate Action 100: http://www.climateaction100.org

Equally, we could choose to proactively seek out and invest in those companies that do align with sustainability values and have attractive future growth prospects. For example, those companies classed as ‘solution providers’ to global sustainability challenges should benefit as government and regulatory initiatives support these areas. There is also evidence to suggest that demand for a company’s products and services will be influenced by how they conduct themselves – 81% of respondents in a brand trust survey conducted by Edelman said that being able to trust the brand to do ‘what is right’ was a deciding factor in their buying decision2, as further support for considering sustainability factors when analysing financial investments.

The reason that the choice of where to invest capital has such an impact is because investors who buy equity shares or debt are important sources of financing for these companies, helping them to grow. In choosing to invest in those companies that are aligned with sustainability values, investors can not only potentially benefit from a positive financial return but also support these companies to continue with their sustainability agendas. Companies whose share prices are supported can then raise further financing at better prices, and vice versa for those companies that are avoided. Pooling money with many other investors, for example in mutual funds, means that this effect is magnified.

Active engagement

Investors can also bring about change through active engagement with the companies in which they invest. Companies can be incentivised to make changes not only to improve their financial performance, but also improve

their approach to sustainability. Again, the two are often linked and engaging with companies to effect change from a sustainability perspective can help reduce the financial risks associated with reputational damage or regulatory burdens.

Climate Action 100+ has grown into one of the world’s largest investor‐led engagement initiatives. There are more than 450 investor signatories with more than $39 trillion in assets under management3, who have committed to engage with the world’s largest corporate greenhouse gas emitters to improve their climate performance and ensure transparent disclosure of emissions. Again, the influence of ordinary investors is magnified when funds are pooled with others and managed by an investment manager who can engage with these companies on end investors’ behalf. Investment managers who hold large ownership stakes through the funds that they manage can hold meaningful dialogue on change with companies and make them accountable for failing to meet agreed targets by voting against management or selling their shares.

When tackling the sustainability challenges that the world faces, applying the same values to financial investments as we do to other aspects of our lives has the potential to have a marked impact in making progress. Although action is being taken by governments and policymakers, we are all collectively responsible for facing into these global challenges, and ordinary investors are key in acting as a powerful force for change whilst safeguarding their own financial futures.

World Shapers: the extraordinary power of ordinary investors 02 November, 2020

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Applying the same values to financial investments as we do to other aspects of our lives has the potential to have a marked impact in making progress.

Ordinary investors are key in acting as a powerful force for change whilst safeguarding their own financial futures.

Important informationInvestors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Past performance is not a reliable indicator of future results. Investors may not get back the amount invested. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. Investors should be aware of the additional risks associated with funds investing in emerging or developing markets.

The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. This document is for the information of the recipient only and should not be reproduced, copied or made available to others.

Brooks Macdonald is a trading name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies.

Brooks Macdonald Asset Management Limited is regulated by the Financial Conduct Authority. Registered in England No 3417519. Registered office: 21 Lombard Street, London EC3V 9AH. Brooks Macdonald Asset Management (International) Limited is licensed and regulated by the Guernsey Financial Services Commission. Its Jersey Branch is licensed and regulated by the Jersey Financial Services Commission. Brooks Macdonald Asset Management (International) Limited is an authorised Financial Services Provider, regulated by the South African Financial Sector Conduct Authority. Registered in Guernsey No 47575. Registered office: First Floor, Royal Chambers, St. Julian’s Avenue, St. Peter Port, Guernsey GY1 2HH.

More information about the Brooks Macdonald Group can be found at: www.brooksmacdonald.com.