Ketan Patel, co-manager on the EdenTree Responsible and Sustainable UK Equity fund, and Phil Harris, co-manager on the EdenTree Responsible and Sustainable UK Equity Opportunities fund share their thoughts on why the UK offers a compelling investment opportunity
UK equities overlooked
The UK has one of the longest standing histories in respect to responsible and sustainable investing, and the region has been a fruitful source of returns for ESG investors over the long-term.
The last few years, however, have been difficult for responsible and sustainable investors in UK equities. A combination of negative Brexit sentiment and the Coronavirus pandemic have weighed heavily on share prices and hampered investor confidence in the market. Although demand for ESG investing continues to grow more widely, the UK has been largely overlooked and under-allocated to, as other regions have outperformed.
Despite this, at EdenTree we remain committed responsible and sustainable investors in UK equities. We believe the UK has a unique opportunity to take a global leadership position as a market for ESG investors, driven by a number of sustained industry trends and a more supportive macro-economic picture for UK equities as we move through 2021.
Supportive environment for ESG investors
A key development is the enormous shift in attitude towards ESG issues that we have seen over the last few years, putting the UK government and capital markets on a positive trajectory to embrace responsible and sustainable factors. For example, we now have previously unseen commitments from the UK government to achieving environmental targets.
The pandemic has accelerated this trend in a number of ways. Firstly, it has brought social issues into much greater prominence, clearly highlighting the social inequities and injustice that exist within the current global financial and economic system.
Secondly, the wave of vast new fiscal stimulus packages to combat the pandemic slowdown in most major developed economies are noticeably targeting green technologies and infrastructure; this was apparent in the UK’s stimulus package which included plans to quadruple offshore wind power, boost hydrogen production, invest in carbon capture technologies and make London the capital of green finance.
Finally, we are seeing strong support from financial institutions and industry bodies to make positive change. For example, Andrew Bailey, the Governor of The Bank of England, has spoken out on the important role that capital markets have to play in achieving the transition to a resilient, carbon-neutral economy.
This is leading us on an irreversible trend towards an increased responsible and sustainable opportunity set for UK equity investors. Combine this with the supportive macro-economic backdrop; low interest rates and low inflation driven by ongoing monetary and fiscal policy, and the hopes of the UK economy re-opening as the vaccine roll-out continues, and the result could be a compelling recovery story for ESG investors in UK equities.
Our responsible and sustainable approach
EdenTree’s Responsible & Sustainable UK Equity Fund and Responsible & Sustainable UK Equity Opportunities Fund provide investors a more complete allocation to UK equities as a whole, which should deliver regardless of market environment.
At the heart of our approach we are responsible and sustainable, bottom-up stock-pickers who look for quality growth and earnings quality across all the companies that we invest in. This ‘quality’ is attributed to companies that are market leaders in their field with defendable market share, attractive profit margins and solid cash flows – growth and returns on capital can only be predicated on these key attributes.
The EdenTree Responsible and Sustainable UK Equity Fund focusses on investing in companies that are resilient across all types of economic climate. Companies must exhibit strong fundamentals, including; market leadership and brand strength, solid balance sheets and cash flow, as well as having a future focussed management team driving shareholder value. Looking for these opportunities primarily across the large and mid-cap spectrum, such an approach has proven over the long-term to result in significant outperformance, and offer more protection through challenging market conditions.
The EdenTree Responsible & Sustainable UK Equity Opportunities Fund puts growth at the heart of its strategy. The team take a highly analytical and hands on approach to stockpicking, aimed at reducing risk and enhancing returns. This includes being sector agnostic and avoiding structurally challenged areas of the market, looking for strong underlying growth, high margins and returns of capital, and profits that convert into cash. Key to outperformance and adding alpha is the funds focus on the mid and small-cap.
Both funds are also managed in accordance with our responsible and sustainable approach. Responsible because we remain committed to the highest standards of business behaviour in stock selection, and sustainable because many of the companies we invest in are at the cutting edge of providing solutions to some of the world’s most pressing socio-economic challenges.
We fully integrate ESG risk factors across our investment process in order to deliver superior returns and add value for clients. This integrated approach covers four key areas: screening, engagement, governance and thought leadership research, for a truly active responsible and sustainable approach.
This holistic and integrated approach to responsible and sustainable investing means that EdenTree is able to provide a specialist UK equities offering, one with ESG at its very core rather than with an ESG framework applied as an afterthought. The growth in the ESG market in recent years has been unprecedented; investment houses of all shapes and sizes are rushing to market new or repurposed products, claiming to be experts in the field. This lack of credibility is an issue, and it adds weight to the accusations of greenwash within the industry.
Last year the travails of Boohoo, the UK fast fashion retailer, did much to fuel this argument that ESG investing is failing to live up to it purported values. In the case of Boohoo, over 20 ESG funds held the name; which was in turn ranked highly by various ESG rating agencies. All of which has lent support to those who are only too willing to write off ESG investing as an exercise in greenwash.
This being the case, fund buyers who want to capitalise on the opportunity presented by the UK equity market need an investment manager with a deep expertise of both the UK and the responsible and sustainable investment landscape. EdenTree brought one of the first ethical UK equity funds to market over 33 years ago, so we are firmly embedded in the fabric of responsible and sustainable investing within the UK.
Star aligning for ESG investors in UK equities
Responsible and sustainable investors in UK equities are now faced with a potentially compelling investment opportunity, provided they are willing to look through the noise and short-term uncertainty.
ESG investors must focus on how the UK is positioned for longer-term future growth, combined with the fact that the region provides a rich seem of companies that are ESG leaders, across a diverse range of sectors such as Healthcare, Industrials, Materials and Technology; providing us as responsible and sustainable investors with plenty of stock-picking opportunity.