Omnis ESG Guide 2022
Exploring our approach to responsible investing using environmental, social and governance (ESG) factors
Investments & Sustainability
Your guide to Omnis' approach
Introduction
A responsible approach
A Responsible Approach
Welcome to the 2022 edition of our guide to responsible investing, which sets out our approach to incorporating environmental, social and governance (ESG) factors into our processes. I hope you find it interesting and informative, and we welcome your feedback.
The coronavirus pandemic and Russia’s invasion of Ukraine have put environmental and social issues into the spotlight. Sustainable thinking is now part of everyone’s life and as a society, at the risk of sounding like a pageant show answer, we all strive to make the world a better place.
As a result, investing responsibly has become even more important as an approach that can benefit everyone involved, as well as deliver attractive investment returns. When it comes to investing, we already use plenty of jargon – and add the subjectivity involved in sustainability and it gets murkier by the minute. Over the next few pages, we hope to be able to concisely explain our approach at Omnis and give you some examples of how our investment managers consider ESG factors into their investment decision making. We have tried to keep things simple, but we’ve also produced this short document that you can refer to that explains the key definitions involves when it comes to sustainable investing.
Delivering sustainable growth
We’re committed to being active investors, and strive to be responsible stewards of our clients’ investments within a framework of good governance and transparency. Core to our investment philosophy, is the belief that well-governed companies are better positioned to manage the risks and challenges inherent in business and to capture opportunities that help deliver sustainable growth. We firmly believe that effective stewardship will benefit companies, our clients and the economy as a whole.
We incorporate ESG factors within our investment process using a scoring system for each fund. We base these scores on a range of issues, including how the managers run our funds, as well as the ESG characteristics of the individual investments they hold. You can read more about our approach in this guide.
We’re dedicated to Omnis being a trusted investment manager. We see ourselves as stewards of your savings, and we believe that incorporating a responsible investment approach is an essential part of our commitment to you.
Dominic Sheridan, Chief Executive Officer
Trends and themes
Don’t get stranded by climate change
Trends and themes
Don’t get stranded by climate change
After decades of debate and denial in the public arena, there is now an almost unanimous consensus that humans are warming the Earth’s climate.
Getting on board
Almost every climate scientist is now on board – a 2021 review1 of scientific literature by academics at Cornell University in the US concluded that there is now “greater than 99% consensus” amongst scientists that global warming is being accelerated by human activity. The United Nation’s Intergovernmental Panel on Climate Change (IPCC) has published a report that stretches to over 4000 pages of evidence from thousands of scientific sources, concluding that “it is unequivocal that human influence has warmed the atmosphere, ocean and land”2.
Global leaders have recognised this, too. Although the recent 2021 COP26 meeting3 in Glasgow disappointed some observers by not taking more drastic steps to solve climate issues, the conference formally expressed “alarm and utmost concern” at the impact of human activities on climate change. Immediately after COP26, we spoke to Hannah Simons, Head of Sustainability Strategy at Schroders and we discussed what COP26 achieved, and of course what it didn’t. Listen to our interview here.
There are now significant efforts underway to limit the impact of climate change on the planet. The COP26 meeting confirmed a desire to limit temperature increases to 1.5oC above ‘pre-industrial’ levels, and reached a number of encouraging agreements: government fossil fuel subsidies are to be phased-out; coal power is to be phased-down around the world; there will be strengthening of markets for carbon emissions; and many countries enhanced their emissions commitments, with over 90% of the world (as measured by GDP) now covered by ‘net zero’ commitments4.
Charting a new course
These efforts will change the investing world forever. By 2023, developed countries expect to channel $100bn a year into climate solutions for developing countries5. This will include both public and private money – governments cannot do the work alone here – and regulators around the world are now supporting investors to make informed investment decisions with respect to climate change. At an international level, a new International Sustainability Standards Board6 will set minimum standards on climate disclosures for companies, to better promote climate-friendly capital flows.
In the UK, ‘ESG investing’ continues to grow rapidly7. It is now set to become more transparent, too; the Financial Conduct Authority ('FCA') is consulting with the investment industry around a new labelling system for funds, to foster meaningful and honest support of ESG investment strategies by private investors. Omnis fully supports the FCA's initiative. Omnis continues to work hard to ensure that its fund range is positioned transparently and with a minimum level of sustainability integrated into each fund’s investment processes.
What risks are on the horizon for investors?
Government programmes to mitigate climate disaster and influence investors are going full steam ahead:ow will this affect companies in investors’ portfolios?
The OECD8 warns that as policies change and ethical standards improve around the world to meet carbon goals, many companies will be left with ‘stranded assets’ – i.e. assets that cannot be recovered as planned. A common example of a stranded asset is oil reserves that will never be extracted (and therefore written-off) due to prohibitively high taxation, reduced demand, shareholder activism, or potential reputational damage. Venezuela, which is thought to have the largest proven reserves in the world9, may end up being a prime example of this – expert analysis of 104 global crude oil sources10 assessed Venezuelan oil as some of the most carbon-intensive to extract, which in time may lead to investors discounting the value of the oil to the point where there is no appetite to extract it. We must also remember though that demand for oil will continue for decades and that oil is also required to help the world transition to cleaner energy. A balance between moving forwards with cleaner energy production and the need for oil needs to be managed over the next few decades.
Technological and manufacturing capabilities can become stranded, too. The Wall Street Journal11 reported on a $1bn investment in 2019 by General Motors in an internal-combustion pickup truck facility, only to announce a year later that it would go “all-electric” within 15 years, with analysts accordingly expecting write-downs in the value of the new assets. Given current trends, examples are conceivable across every industry from central heating to cattle ranching to ‘fast fashion’.
In Jakarta, the capital of Indonesia (the world’s fourth most populous country12), climate projection models tell us that some assets will become stranded in a more literal sense. It is estimated that a combination of land subsidence and rising sea levels could make 95% of the city’s northern side uninhabitable within 30 years if action is not taken13.
Stranded assets do not have to be physical in nature. In a June 2021 report14, the European financial activist group Reclaim Finance highlights the significant reliance that banks have on fossil-fuel-linked financing on their balance sheets. They warn that as organisations respond to changing stakeholder demands and retreat from fossil-fuel-linked business, such banks will be left with deteriorating and hard-to-sell assets. Some governments may find themselves adrift from the capital markets, too – research from the International Monetary Fund15 suggests that nations with lower resilience to climate change may face higher borrowing costs.
How can investors use ESG approaches to navigate these risks?
Some fund managers will explicitly exclude those companies from their portfolios that have significant reliance on oil and gas assets. Others will spot the potential advantage that companies with leading practices may have over their rivals, such as a traditional fossil fuel distributor which diversifies into distributing cleaner fuels or building electric car charging points, with the hope of enjoying superior returns.
Others will carefully build climate-change-related risks into their risk modelling tools. For example, when assessing prospective equity investments, they may build scenario tests that estimate a given company’s value should carbon taxes rise or oil prices change significantly due to climate change. Perhaps more importantly, many fund managers, including those we work with at Omnis, will use their power as investors to drive climate change agendas in the companies they invest in. This is something we expect all our investment managers to do and to be able to demonstrate how they have voted and engaged on climate-related issues, amongst other ESG factors.
Whilst some of these approaches might drive ethically desirable outcomes, they are all also designed to improve financial returns for investors. In order to be successful, fund managers will have to carefully navigate these approaches, and others, and apply them in a world where responses to climate change are evolving rapidly.
Responsible activities
The Openwork Partnership
Responsible activities
The Openwork Partnership
At The Openwork Partnership, of which Omnis Investments and 2plan wealth management are a part, our vision is to be the leading financial advice company in the UK by delivering better outcomes for more clients.
At the heart of our business there are over 4,300 financial advisers based in more than 700 firms and supported by 630 colleagues in our central teams.
Over the next few pages you can see some of the initiatives that align our partnership’s activities with our responsible investing credentials.
Limiting our impact on climate change and the environment
- 2022 focus: Our Corporate Social Responsibility Action Group’s 2022 focus will be on environmental issues, particularly climate change.
- Smarter travel: Our ‘flexible working’ policy allows colleagues to work from home, and when they do travel, our ‘Cycle To Work’ scheme and electric charging points at our Swindon office encourage more eco-conscious travel.
- Smarter offices: The buildings we occupy in both Swindon and London perform exceptionally well on energy efficiency measures, and we are constantly improving our recycling, composting, and supply sourcing practices. We have undertaken a ‘rewilding’ project in the grounds of our Swindon office.
- Environmental initiatives: We are part of the ‘Plant a Tree’ initiative launched by Zurich. Since 2020, The Openwork Partnership helped plant over 60,000 trees on behalf of their clients. That’s the equivalent of planting 24 football pitches’ worth of new forest.
- Carbon neutral goal: We measure and report on our carbon footprint – we are committed to an ambitious target of becoming carbon neutral by 2030 at the latest.
Further details of Openwork’s approach to caring for our environment can be found here.
Supporting our colleagues
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Better mental health & wellbeing: We have initiatives to support colleagues with mental health and wellbeing, including regular surveys to identify those who need more help, online classes for Pilates and yoga, free subscriptions to the premium wellbeing/mindfulness app CALM, as well as online social events and a team of trained Mental Health First Aiders. Our reward package includes access to an Employee Advice Programme, providing counselling in confidence with an external provider.
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Diversity: We have a colleague Inclusion Action Group, which is helping us to enhance our Diversity and Inclusion strategy. Members have taken part in various initiatives such as ‘Join the Conversation’ videos and 'Black History Month' education events. ‘Count Yourself In’ was a new addition to encourage colleagues to get involved and share their protected characteristics so we can better understand and improve the diversity within Openwork. We are signatories for the 'Women in Finance Charter', Winners of the PIMFA Best Approach to Wellbeing award, and Swindon Carers Award accredited.
Supporting our communities
The Openwork Foundation was launched in 1981 to support disadvantaged people in the UK and overseas and has donated over £21.4 million to good causes since it stated. It is funded and supported by colleagues, Partners and financial advisers of The Openwork Partnership across the UK. We fundraise through regular donations, fundraising challenges and social events.
Here you can see a highlight of our achievements during 2021. If you want to find out more about The Openwork Foundation, please click here.
Omnis’ responsible approach
Omnis’ responsible approach
We are advocates of responsible investing and believe that it should generate better outcomes for our investors over the longer term.
Making good financial sense
Investing in well-managed companies that have a considered impact on society and the environment makes good financial sense – this is the foundation of the rationale for ESG (Environmental, Social, Governance) investing. In addition to any positive environmental and social benefits, these types of businesses are likely to be better managed, more capable of effective capital allocation, and less likely to face regulatory pressures. These factors should ultimately be reflected in a company’s share price and investors’ returns.
For example, if a company suffers reputational damage because it poorly manages greenhouse gas emissions, is discovered to be treating its workers poorly, or is accused of corruption, then its share price may suffer. Meanwhile, companies that use energy efficiently, invest in training their employees, and reward their executives for doing the right thing, may be more likely to outperform their competitors and return more value to shareholders. Over the long term, they may also be better prepared to meet future strategic challenges and take advantage of new business opportunities.
Setting standards
For these reasons, we set responsible standards for our investment funds:
- Insisting on responsible stewardship. We ask our investment managers to adopt policies to actively exercise asset voting powers over the companies in which they invest, to drive positive change.
- Tested for today and tomorrow. Many investment products in the marketplace make claims around their responsible characteristics or ESG values, but they may not stand up to scrutiny. With that in mind, we are proud to say that our independent consultants Fundhouse conduct thorough annual testing of our fund range – the results of their latest review can be seen in the section ‘HOW RESPONSIBLE ARE YOUR INVESTMENTS?’. This review ensures that the funds meet our responsibility expectations today and are improving in order to reach even higher standards in the future. We also work closely with our investment managers to ensure that they are ready to comply with any forthcoming responsible investment regulation.
- Selecting investment managers that share our values. In order to align managers with better outcomes for our clients, we insist that our investment managers are signatories16 to the UN Principles of Responsible Investing and the UK Stewardship Code.
Signatories to the United Nations-backed Principles for Responsible Investment (UN PRI) must adapt their investment processes to include ESG issues, and act as more responsible stewards of capital. Signatories acknowledge that acting in the best long-term interests of their investors must involve incorporating ESG issues into investment processes.
The UK Stewardship Code requires signatories to report on how they apply stewardship principles to their investments, which includes how they engage with the companies they invest and also improves transparency around corporate governance.
16Or can evidence that they are working towards signatory status and publicly adhere to all the policies set out by these schemes in the meantime
What we don’t do
We want to select best-of-breed investment managers and approaches that are the right fit for the funds we offer to investors, focussed on our primary goal of generating good long-term financial outcomes. So, aside from the standards that we describe above, we refrain from applying too many other ESG restrictions to our funds. Whilst some of our appointed investment managers will choose to exclude companies from certain industries, for example, this is not something we currently mandate them to do. Nor do we ask our investment managers to engage in ‘impact’ investing (where generating a positive impact on the environment or society might come at the expense of financial returns) or to target more granular ethical outcomes (as an investor in an Omnis fund your ethical priorities may differ from other investors in our funds).
Climate change showcase
Our investment managers are working hard to deliver good financial outcomes for our clients in a responsible manner. We’re pleased to share some success stories about how they are pushing their portfolio companies to combat climate change, or making important changes within their own businesses.
How responsible are your investments?
How responsible are your investments?
Measuring our funds
Our independent consultants, Fundhouse use a proprietary process to annually score our funds on an ESG (Environmental, Social, Governance) basis. We believe that these scores give a fair and balanced representation of the depth and quality of responsible activity that is taking place within each of our funds.
Firstly, they survey each of our investment managers to understand the ESG characteristics of their investment approach. This includes measuring to what extent they consider ESG factors when making investment decisions, any ethical exclusions that might be applied within the portfolio, and the degree to which the manager has pedigree in responsible investing.
Secondly, they survey our investment managers’ firms to understand how deep responsibly investing goes within their organisations. This includes aspects such as the extent to which they plan to reduce greenhouse gas emissions, whether governance structures are in place to ensure good ESG behaviours, whether the firm engages with supranational bodies and governments to bring about change, and the promises and progress that the firm has made towards responsible goals. They also test the proportion of each firm’s capital that is run to investment mandates that have specific ESG goals.
Thirdly, using input from a specialist third-party data provider, every investment inside our funds is measured for ESG characteristics.
Every year, Fundhouse raises the bar with their ESG scoring, to keep up with ESG best practices and regulatory advances.
How the funds score
Finally, these inputs are then blended together to create a final score, which we show in the table on the next page and ranks each fund from an ESG perspective as follows:
1 = Excellent
2 = Good
3 = Requires Improvement
Please note that these scores refer only to ESG considerations and are in no way designed to indicate whether or not a fund is an attractive investment. ESG factors are more applicable to some regions and asset classes than others, and a fund rated lower on the ESG scale may excel in other parts of its process and/or be investing in an asset class or region where ESG considerations are simply less relevant. The fund ESG scoring system
Some funds in the UK investment market have a mandate to invest with ‘positive impact’ or may have many restrictions placed on their portfolios (perhaps to the detriment of returns). Those funds would be likely to rank higher in our framework. The Omnis funds do not have such mandates, but we believe that our funds score as expected, or better, for funds of their type and for the approaches that our investment managers take to ESG implementation.
How have we improved?
Since our last annual review, published in May 2021, what responsible improvements have been made to the Omnis fund range?
Two of our funds have improved their scores, and none have fallen in score.
- The Omnis UK All Companies fund is now rated ‘1 – Excellent’, up from ‘2 – Good’ last year. This has been driven by changes such as: higher levels of ESG engagement with portfolio companies; stronger ESG scoring of portfolio companies; more firm-wide assets run to responsible mandates.
- The Omnis US Smaller Companies fund is now rated ‘2 – Good’, up from ‘3 – Requires improvement’. This has been driven by changes such as: improved accountability of staff for ESG outcomes; higher levels of ESG engagement with portfolio companies; screening-out firms linked to human rights abuses.
All Omnis' funds score a ‘2 – Good’ or a ‘1 – Excellent’.
Climate change - More of our managers now measure the carbon footprint of their investment portfolios, and exclude investment opportunities on environmental issues.
Weapons exclusions - More of our managers screen-out investment opportunities that are linked to nuclear weapons and other controversial weapons.
Carbon neutral goals - We have asked our investment managers to disclose their carbon neutral objectives. We are pleased that, out of the 15 different asset management companies that we partner with, 12 have carbon neutral objectives, 2 are currently carbon neutral today, and one will become carbon neutral within 12 months.
Looking forward
The FCA are currently consulting with the industry and other stakeholders on changing regulations around sustainability disclosures and labels, in order to make sustainable investing easier and more transparent for consumers. Omnis has been working closely with Fundhouse to ensure that our investment managers are well prepared to meet any such regulatory changes and achieve a minimum level of sustainability.
Please note that we have been unable to rate some Omnis funds because we were not able to meaningfully assess their holdings for ESG characteristics for one of several reasons: either they contained a high proportion of government bonds (assessing government bonds for ESG is difficult and highly subjective), or they invest in other funds, which we are not currently able to accurately assess.
These funds are:
- Omnis UK Gilt
- Omnis Managed Cautious
- Omnis Managed Balanced
- Omnis Managed Adventurous
- Omnis Multi Manager Cautious
- Omnis Multi Manager Balanced
- Omnis Multi Manager Adventurous
- Omnis Multi Manager Distribution
Sustainable investing in practice
Sustainable investing in practice
Here are some of the ways our investment managers responsible for our funds have been engaging with companies that have a commitment to using the principles of ESG in their approach.
Omnis Multi-Asset Income Fund
The investment team at BNY Mellon met the head of sustainability and investor relations team at multinational beverage company Diageo. They discussed water as a material environmental risk. The team found Diageo’s approach to be thoughtful and demonstrative of its leadership in dealing with water-related dependencies. With water being a key material source, it’s a top priority for the company.
Diageo was among the first to develop an integrated water stewardship strategy in 2011, covering its use in supply chains, operations and communities. Globally, the company is aiming to achieve 30% water-use efficiency by 2030, with a higher target of 40% set for water-stressed regions like India, Latin America, Indonesia and sub-Saharan Africa. Working with smallholder farmers, the focus has been on improving overall productivity and not just water management.
Omnis UK All Companies Fund
The team at Franklin Templeton spoke to leading UK food producer Cranswick about the company’s commitment to investing in technology and modern production techniques in an industry where others have refrained from spending money. Cranswick has demonstrated the highest level of animal welfare standards and was awarded a tier 1 rating in the recent Business Benchmark on Farm Animal Welfare (BBFAW) report, demonstrating that animal welfare is integral to business strategy. The company explained its sustainability strategy, and how the principles are ingrained in the group’s main commercial strategy, seeking to address environmental and sustainability issues in the way it operates. ESG considerations underpin the case for investing in Cranswick. The increasing importance of food provenance and higher standards of animal welfare are all raising the bar for companies, thereby increasing capital requirements to operate efficiently in the market, as well as acting as strong barriers to entry for new players.
Omnis UK Smaller Companies Fund
Volution is a UK-based international designer and manufacturer of energy-efficient indoor air-quality solutions for health. The company focuses on sustainability and offers products that help improve air quality and reduce energy usage in residential buildings. The investment team at Franklin Templeton were impressed with Volution’s attractive fundamentals and long-term growth prospects, as more countries adopt higher standards to building construction to reduce carbon emissions. They believe the company has growth potential, offering a compelling investment opportunity. Their in-depth research, based on financial and ESG measures, including climate transition analysis, helped the investment thesis and its growth potential. Following its examination of Volution, the team has increased the size of its investment, favouring exposure to the structurally growing demand for residential ventilation to reduce carbon emissions.
Omnis Diversified Returns Fund
Fulcrum Asset Management believes using its shareholder voice is an important part of managing ESG risks and issues. The adoption of the Glass Lewis Climate Overlay service has been an important development in strengthening its voting position and holding companies accountable for their sustainability strategy. The fund manager has joined investor networks focused on climate change, such as the Institutional Investor Group on Climate Change, CDP and Climate Action 100+, to engage with corporate issuers, governments and other investors.
The team is seeking to strengthen its ESG engagement policy, with further details to be made public during 2022. Fulcrum recognises the importance of innovation in the ESG data space. Working with partners at Arvella Investments, they have contributed to the launch of an innovative new tool, ESGforInvestors.com, offering free-to-use ESG applications for professional investors that aim to boost impact and risk-adjusted returns.
Omnis Absolute Return Bond Fund
The investment team at Hermes engaged with Alcoa, a major global producer of aluminium. Alcoa has approximately 14,000 employees in 15 countries and has access to bauxite reserves at seven mines in Australia, Brazil, Guinea and Saudi Arabia, and operates seven alumina refineries. Hermes has engaged with Alcoa since 2019 on its climate action strategy, driven by its objective for the company to set a science-based target.
Insight gained from subsequent engagements gave the team confidence that Alcoa is heading in the right direction. They were pleased by the company’s increasing ambition since starting the conversation in 2019. Alcoa continues to engage on the next milestone for its objective, which is validation of the scientific basis for a 1.5 degree-aligned emissions reduction pathway in the targets being set. Phasing out coal-driven production assets will continue to be a key point in future engagement.
Omnis Income & Growth Fund
The team at Jupiter engaged with BP, which is Jupiter’s largest holding in the oil and gas sector. Given the size of multinational oil companies like BP, they have found that it can be difficult for shareholders to exert influence via engagement on an individual basis. Concerned about the company’s management of climate risk, Jupiter acted collectively with other institutions to co-file a shareholder resolution calling on the company to set out how its strategy is consistent with the Paris Agreement.
BP’s management had previously given their support to the resolution, highlighting an openness to constructive dialogue and integration into the group’s strategy. The resolution was approved almost unanimously by shareholders, and recommendations are being incorporated into the company strategy. For all new projects, BP will disclose its carbon emissions and climate impact, as well as how these are considered consistent with the goals of the Paris Agreement.
Omnis Global Emerging Markets Equity Opportunities Fund
The investment team at Somerset became a signatory to the FAIRR initiative in 2021. This global investor network is conducting the first collaborative engagement encouraging the world’s largest food companies to diversify their protein sources away from animal proteins and tackle the use of antibiotics in their products. The team met with YUM China and China Mengniu Dairy to encourage measuring their environmental impact and discuss their climate adaptation and mitigation strategies.
At the moment, both companies are in the early stages of measuring their full environmental impact, displaying the effectiveness of the team's suggestions. They are also thinking about their longer-term strategy to decarbonise. The investment team is encouraged by YUM China’s progress, including signing the Business Ambition for a 1.5-degree commitment. They will continue to monitor how they develop a strategy to reduce emissions with their suppliers.
Omnis Global Bond Fund
The team at Western Asset engaged with an oil and gas company that has been slower than its peers in providing tangible targets, only setting two goals for emissions – reducing methane emissions and flaring from 2016 levels. Management acknowledged it had made progress in reducing greenhouse gas emissions through optimisation and efficiency and is on track to achieve this target where the focus has been on carbon capture technology.
Nonetheless, the lack of other targets is a concern and one that has the Board of Directors’ attention, and a strategy is likely to be developed. At the time of engagement, there appeared to be no change in strategy towards renewables like others in the peer group. Western Asset encouraged a strategy of increased transparency and goal setting and, following the company’s engagement with third-party ESG agencies, will continue to monitor its progress towards meeting its targets.
Conclusion
Looking forward
Conclusion
Looking Forward
We hope this guide has helped you understand Omnis’ approach to integrating Environment, Social and Governance considerations into our investment process and the importance that we place on sustainability and responsibility as an organisation.
We spend a lot of time with our investment managers trying to understand their approaches to ESG and how they have used their power as shareholders to drive change, whilst maximising returns for investors in our funds.
Over the next 12 months we will provide regular updates on what our managers are doing from an ESG perspective and these will be available to you through your financial adviser or on our website. Your adviser will also be able to provide you with more information on how your investments are managed and how they have been performing.
The Omnis funds are available exclusively through financial advisers from the award-winning Openwork Partnership, one of the UK’s largest financial advice businesses. To find out more about The Openwork Partnership, click here.
If you would like to find out more about our funds please speak to your financial adviser or visit our website.
