Sustainable Investing With a Value Tilt

Schroders' Kevin Murphy explains to Morningstar analyst Peter Brunt why the "S" of ESG is as important as environmental and governance concerns

Peter Brunt 10 May, 2019 | 8:27AM
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Peter Brunt: Hello, and welcome to the Morningstar Investment Conference here in London. I'm Peter Brunt and joined by Kevin Murphy, Co-Head of Schroders Global Value team to talk about sustainable investing with a value tilt.

Hi, Kevin.

Kevin Murphy: Hi, Peter.

Brunt: Thanks for joining us. Maybe we can start by you telling us what ESG investing means to you?

Murphy: Okay. So, ESG at the minute is a hot topic in finance clearly and lots of people focus predominantly on the E of ESG. So, that's the environmental side. When they're thinking about that, they're thinking about things like wind farms or new battery startups. The issue with thinking about that or focusing on the E is it leads you to focus on small, microcap, new technology businesses and that can introduce some significant style biases into your portfolios. Instead, we think it's worthwhile thinking about the whole of ESG in its totality. The E for environment is important, but so is the stakeholders and the government side. So, the stakeholders, for example, would be the suppliers into the business, it would be the customers of the business, it would be all the staff of the business. In fact, it's every relationship of that company will have with the entire value chain and that to us is an extraordinarily important and all encompassing risk when thinking about companies.

The G side, the governance side is equally important because that is the management side. That is the, is there appropriate staff on the board, are there appropriate checks on balances, appropriate incentive structures. Ultimately, are the management team capable of running that business in the best interest of shareholders. And, of course, as us, as active shareholders, that's an extraordinarily important part of an investment case.

Brunt: So, you've recently launched an ESG-focused mandate. Maybe you can tell us a little bit about the differences in practice between your mainstream UK key portfolio and the one that has that ESG focus?

Murphy: Okay. So, we introduced and integrated ESG across all of our funds. And thinking about the, for example, the E, the S and the G, is fundamentally important to all of our portfolios on our desk. However, there is one portfolio that we manage, the Responsible Value Fund, which runs to an exclusion list as well. What does that mean? It means that when we're thinking about companies, the starting point is we will look at or everything that we can see that we find is cheap enough in the marketplace and that's important. It starts off on the valuation-based screen. It has to be sourced from the same place as all other stocks.

As we go through the research, we think about the business, we think about the risks and then we think about the government side. And it's only at the portfolio construction side, portfolio construction end, where the two portfolios diverge. The responsible value fund has an exclusion list, those run in conjunction with the Church of England, where their ethical screen, their stakeholder screen, their government screen is introduced, which says things like, for example, under no circumstances and at no prices, do we want to invest in companies that extract significant amounts of thermal coal. No price and no circumstances do we want to invest in companies that have introduced ornaments, for example, or gambling stocks for example or predatory lending. Those kind of exclusions, but it’s only at the portfolio construction side that the two portfolio is different.

Brunt: Okay. Thanks very much, Kevin.

Murphy: Thank you.

This article is part of Morningstar's special report on What the Experts Say

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Peter Brunt  is a Senior Fund Analyst for Morningstar UK

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