As £5 trillion passes from baby-boomers to their Millennial and Gen Z heirs, young people will have the financial clout to make a decisive difference to the environment and societies in which they live. Yet it is not always easy to judge whether investments are the genuine forces for good they claim to be. In the latest in our series on the Great Wealth Transfer, we look at how our company’s distinctive approach to meeting environmental, social and governance (ESG) priorities is delivering real benefits, real change and real transparency.
As a young person, your spotlight on sustainability, social inclusion and other key ESG priorities is forcing investment managers and company boards to sit up and listen. They could lose out on a vast amount of funding if they ignore your calls.
Moreover, it is far from just young people who want to invest in companies that are committed to doing the right thing. Recent research indicates that a strong majority of investors believe that companies should embed ESG and sustainability directly into their corporate strategy.
No compromise
ESG expectations continue to evolve. The UK is not experiencing the kind of pushback against ESG we are seeing in the US. Nonetheless. UK investors are asking more searching questions. They want to make sure that ESG drives longterm growth, performance improvement and returns, rather than there being a trade-off between financial, environmental and social priorities. Concerns over misleading or unsupported claims – so-called ‘greenwashing’ – are also spurring growing demands for greater transparency and accountability.
Enduring commitment
For us here at Stellar, ESG is not a passing fad. We have always preferred to invest in and nurture businesses that create employment, enrich communities and safeguard our environment. Thanks to the client funds invested in our Family Trading Companies, houses will be built, trees will be planted and jobs will be created. You are also supporting the real economy and longterm prosperity in this country, with our portfolio spread across a series of non-correlated asset classes, all tangible and all located in the UK.
In 2021, we took our commitment to ESG to the next level by signing up to the UN Principles for Responsible Investment (PRI). In line with the PRI, we make sure that we build ESG issues into our investment analysis and decision-making, as well as policies and practices as owners. A key part of this is screening the companies we invest in and monitoring performance.
Investor win-win
For us, ESG can deliver financial as well as social and environmental benefits by bolstering returns for our Family Trading Companies clients.
Our commercial real estate developments are a clear case in point. To augment the appeal of the light industrial units we have developed in Hoddesdon and Tunbridge Wells in recent years, the modern design includes the green and resource-efficient specifications needed to secure an ‘excellent’ Building Research Establishment Environmental Assessment Methodology (BREEAM) sustainability rating.
The independent BREEAM assessment assures potential buyers and occupiers that the development meets environmental best practice, while helping to boost operational efficiency and contain energy costs. With a quarter of the UK’s greenhouse gas emissions coming from buildings, incorporating the environmental measures needed to secure an excellent BREEAM rating can have a hugely positive impact.
A high BREEAM rating can also help to boost investment returns. Research carried out by Knight Frank, the leading real estate consultancy and agency, highlights the extent to which positive BREEAM credentials make the units more attractive and potentially higher value to buyers and occupiers than if uncertified.
Credible measures
When rating investments and their performance, we recognise the need to build credibility and trust, not only in guarding against misleading claims, but also improving decision making and returns.
Unfortunately, there is no one-size-fits-all approach to ESG assessment. The guidance from regulators is inconsistent and often open to interpretation. The challenges are exacerbated by ESG rating agencies’ use of quite different methodologies. This can often lead to contradictory results, where the same company is deemed ‘good’ or ‘bad’ depending on how the rating agency weights each of the environmental, social and governance factors.
So we recognised the need to create our own approach to ESG assessment, which is designed to be both holistic and pragmatic. We have established bespoke questionnaires for each sector which aim to get to the heart of what good practice looks like across each respective industry. Answers to these questionnaires help form the basis for strengths, weaknesses, opportunities and threats (SWOT) analysis. Using the results, we score each of our asset-backed businesses out of a total of 40 points, with 10 points on offer for each of the environmental, social and governance factors, as well as progress as part of their direction of travel (DOT).
We analyse the companies or business opportunities we are looking to invest in prior to approving any funding and at least annually thereafter. They must score 24 out of 40 points to qualify for investment.
We support improvement in ESG quality and disclosure by developing annual action plans for each of the businesses we invest in. If their scores fall below 24 on follow-up assessment, they will be subject to enhanced scrutiny and have 18 months to improve or risk divestment.
Never stand still
What this all adds up to is an approach to ESG that is both tangible and transparent. However, we recognise the importance of continuous improvement, which is backed up by periodic assessment and guidance from the PRI.
