Omnis ESG Guide
Exploring our approach to responsible investing using environmental, social and governance (ESG) factors
Aligning portfolios with ESG values
Explore our approach to responsible investing using environmental, social and governance (ESG) factors
A responsible approach
Welcome to the 2021 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 has put environmental and social issues into the spotlight over the past year. One result is that responsible investing has become even more important as an approach that can benefit everyone involved, as well as deliver attractive investment returns. We’ve produced this guide to help you understand the different descriptions, as well as what’s involved.
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.
Chief Executive Officer
What is responsible investing?
What is responsible investing?
If you’re a bit confused about what it means to be a responsible investor then you’re not alone. You’ve probably heard the terms responsible, ethical, sustainable and impact, which are all different approaches to investing in ways that can have positive results for society and the environment.
Responsible investing has developed over many years, with little collaboration between fund managers and investors. Times are changing, however, and what used to be a niche area has become mainstream in a short space of time. Where investments and social and environmental aspirations used to be separate activities, they are now becoming aligned. The importance of investing both sensibly and responsibly is increasingly seen as a non-negotiable requirement by investors and fund managers alike.
The investment industry is racing to catch up by providing funds that cater to a range of responsible investing expectations and in some cases simply to articulate the good practice that they already had in place but didn’t necessarily tell us about. First, let’s take a look back at where we have come from, and try to make sense of some of that jargon.
Responsible investing is nothing new. While the origins of the language are slightly hazy, governance considerations (the G in ESG) seem to have first been formally considered in the mid-1800s. Greed and incompetence took hold during the railway boom in the UK (an early example of an investment bubble), and investors suffered widespread and significant losses.
Wary of a repeat performance, investors insisted on some sort of formal check on companies, and the audit was born. As a result, investors could start to include corporate governance into their analysis before investing. Responsible investing has evolved significantly since then. Fast forward to today and many of the factors incorporated in this way of investing align to everyday concerns – such as climate change, social justice and corporate responsibility. Broadly speaking, they fall into three categories: environmental issues (E), social factors (S) and corporate governance matters (G).
Despite the importance of ESG in our lives, there is still surprisingly little consensus on language in the investment industry. One of the reasons is that there are few regulations and because investors have different opinions and approaches when it comes to implementing ESG considerations. However, some standards are starting to emerge, and the Investment Association (IA) - the trade body representing the UK’s investment management sectors has been working closely with the industry on this.
The language we use throughout this report is in line with the IA’s framework. We have defined some common terms below so that you can refer back to them as you wish. Other providers may use the same words to mean slightly different things. If in doubt, it is always worth asking them (or us) to clarify.
An umbrella term used to incorporate many aspects of non-traditional investing, including ESG and ethical components. It is often focused on avoiding unnecessary risks and should not usually involve having to accept lower returns.
Involves incorporating ESG factors into a robust and repeatable investment process. ESG integration in many instances focusses on reducing risk in the portolio and investors should not have to give up returns.
The responsible management of money to create long-term value for investors. This incorporates many aspects of investing, but is now usually taken to include ESG factors, recognising that ‘value’ is not just a financial concern.
Identifying activities you do not want to invest in and excluding them from a portfolio – such as controversial weapons. It may result in returns diverging from the wider market at times if the exclusions are extensive. However, there’s evidence to suggest that in the long-term returns do not need to be sacrificed providing the screening is applied skillfully. Most of our managers use some form of negative screening in their investment process and apply this to our funds.
Investing in line with an investor’s personal ethical beliefs and standards, which often involves negative screening. It’s a personal approach, as everyone has slightly different ethical preferences and beliefs. Examples include not investing in companies that generate more than a certain proportion of their revenues from activities related to gambling or from tobacco products because the investor feels strongly about how these issues impact society.
Identifying companies that score highly against a range of ESG factors in order to capture opportunities, rather than to just avoid risks. These types of businesses should be more profitable and better placed to take advantage of emerging trends, as well as making a positive contribution to the world. Examples include a renewable energy company or a pharmaceutical firm reducing the cost of healthcare to make it more affordable for all. The investment case must also make sense from a financial perspective, but these types of companies are often well-positioned for the future. There is growing evidence to suggest this approach can enhance long-term returns.
Investing to have a positive impact on the environment or society, which can (although is not always) at the expense of some financial return. An example is investing in social housing or companies generating jobs in areas of high unemployment.
Charitable giving to worthy causes on a large scale. Philanthropy must be more than just a donation. It is an effort an individual or organisation undertakes based on an altruistic desire to improve human welfare. Wealthy individuals sometimes establish private foundations to facilitate their philanthropic efforts. Philanthropy focuses on giving back to society and not on investment returns.
Trends and themes
Work may never be the same again
Trends and themes
Work may never be the same again
The Covid-19 pandemic has changed many aspects of our lives. Our working routines have shifted too, and, for some, they may never go back to the way they were.
During the pandemic, we’ve all had unique experiences at work. In the UK, healthcare workers have borne the brunt of the pandemic, with the NHS reported as being under immense strain, and surveys in 2021 revealing a dissatisfied and stressed-out workforce. Separately, ethnic minorities have experienced higher mortality rates than others, partly because they are more likely to work in higher-risk roles, such as healthcare.
Work has been difficult for people in travel and leisure as well. The physical restrictions placed on these industries have put some businesses on life support for much of the pandemic, and this effect has been compounded by travel being suspended for long periods. As a result, 8 in 10 staff working in the hospitality sector were furloughed at some point in 2020.
Some of us with desk jobs have felt comparatively lucky by being able to skip the regular commute and instead work from home. But even then, pressures from childcare, limited space and lockdown restrictions have taken their toll on health and morale. In a recent survey by Microsoft, people working from home reported that they now tend to work longer hours as the line between home and work has blurred.
Managing through the crisis
Organisations around the world have made headlines for the way in which they have treated staff during the Covid-19 pandemic. Managing a workforce through these unprecedented times has been a big challenge for businesses everywhere, but some have done a much better job than others.
Many companies in the service sector (including The Openwork Partnership – see their approach here and ESG at Omnis here) have allowed people to work more flexibly over the Covid-19 period and introduced initiatives to support staff with their mental health and wellbeing.
Some have added generous new benefits. For example, American supermarket chain Target introduced extensive allowances for children’s daycare and tutoring. Target hopes this move will improve staff wellbeing, and help to retain female staff who are statistically more likely to bear the primary responsibility for such tasks.
Some companies have looked outside their own organisations to try to be better corporate citizens. For instance, drinks manufacturer Diageo launched a $100m ‘Raise the Bar’ fund to help pubs and bars around the world create safer working environments for staff and customers during the pandemic.
Contrast such positive headlines with the PR disaster that internet retailer Amazon has recently experienced. In April 2021, the firm was widely ridiculed after initially mocking, and then accepting, an online news story which claimed that during the pandemic (when the firm made record sales) their staff were afraid of taking bathroom breaks.
We also saw headlines in relation to investment bank Goldman Sachs in March 2021, when it found itself embarrassed by a leaked presentation that was prepared for management by a group of new graduate hires. It highlighted their dissatisfaction over their work–life balance, which included 95-hour/six-day working weeks that were partially a consequence of the record volumes of business that the firm has been experiencing during the pandemic. Such headlines were all-the-more jarring to readers given that staff have suffered while the companies have done so well during the pandemic.
What are the implications for getting this wrong?
Companies will be keen to inspire positive rather than negative headlines, given that this has an effect on their brand, which could ultimately influence their bottom line. Nevertheless, enhancing public perception of a brand is not the only reason why a company might want to take good care of its workforce. In 2016 , researchers at Fordham University in New York analysed over a quarter of a million anonymous employee reviews from the popular jobs website Glassdoor.com, and found a positive link between employee satisfaction and company performance. This is a more recent addition to research over many decades suggesting it is in shareholders’ own best interests to treat their employees fairly. This gives investors good motivation to ensure they consider social factors carefully when selecting investments, especially in a world of work that is changing rapidly.
How can investors use ESG approaches in this context?
Fund managers can do a number of things to identify companies that treat their employees more fairly. Some fund managers exclude companies that have a record of poor employee relations and human rights abuses (‘negative screening’). Others balance the potential upside they see from investing in a company’s shares against risks arising from poor workforce management, such as negative press, fines from regulators, and declining ability to attract and retain talent (‘ESG integration’). Others spot the potential advantages that companies with leading practices may have over their rivals, and actively select businesses that excel in these areas, with the aim of capturing superior returns (‘sustainable investing’).
All of these approaches, while ethically commendable, are also designed to improve financial returns for investors. A fund manager’s remit is to manage money against the objectives of the strategy. Yet in order to be successful as the industry embraces sustainable investment approaches, they are likely to have to carefully consider which ESG approaches are right for them and their clients, and apply them in a post-Covid world of work.
Companies that can keep their employees safe and happy in the post-Covid world of work may enjoy better performance than others. Successful investors will need to be aware of this when building portfolios.
ESG at The Openwork Partnership
ESG at The Openwork Partnership
At The Openwork Partnership, which Omnis Investments is part, our vision is to be the leading financial advice company in the UK by delivering better outcomes for more clients, through our reputation and by growing.
At the heart of our business there are over 4,300 financial advisers based in more than 700 firms and supported by 600 colleagues in our central teams. Together we are a partnership and financial advice is what we do – it’s our shared history, our DNA.
Here are some of the initiatives that align our company’s activities with our responsible investing credentials.
The Openwork Foundation was launched in 1981 to support disadvantaged people in the UK and overseas, and has donated over £20.8m to good causes since it started. It is funded and supported by the colleagues, Partners and Financial Advisers of The Openwork Partnership across the UK. We fundraise through regular donations, fundraising challenges, and social events.
For more information about The Openwork Partnership’s commitment to being responsible citizens and supporting our communities, click here.
Our ‘flexible working’ policy allows colleagues to work from home when appropriate, reducing unnecessary travel.
When we return to our offices, we have a cycle to work scheme to encourage employees to avoid driving wherever possible and to help reduce our greenhouse gas emissions.
We produced a carbon footprint report. It has provided us with a baseline measurement for our carbon footprint, which we are striving to reduce. We are committed to an ambitious target of becoming carbon neutral by 2030 at the latest.
The buildings we occupy in both Swindon and London perform exceptionally well on energy efficiency measures.
For more information about The Openwork Partnership’s commitment to being environmentally responsible, click here.
Throughout the Covid-19 crisis, The Openwork Partnership has introduced initiatives to support everyone with mental health and wellbeing. These measures include 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.
We have created a colleague Inclusion Action Group, which is helping us shape our Diversity and Inclusion strategy. Members recently took part in a video called “Join the Conversation”, where we invited guest speakers to discuss diversity issues that mattered to them.
For more information about how The Openwork Partnership puts colleagues at the heart of what they do, click here.
- The Colleague Forum exists to represent colleagues and contribute to the continuous improvement of the business. We intend to improve colleague involvement by representing views and ideas, as well as sharing information from senior management and other areas of the business. We believe that, as well as the strong board and committee structure which we have in place, the Colleague Forum provides additional checks and balances at all levels of the business.
The Openwork Partnership Shareholder Council aims to act on behalf of members, to be an effective steward of the assets that members own. We firmly believe that the way in which we manage money should always be in the best interests of those whose money it is. The Shareholder Council holds us accountable to these standards.
- The Corporate Social Responsibility Action Group within The Openwork Partnership is dedicated to furthering our CSR efforts. We use the term, ‘Corporate Social Responsibility’, or ‘CSR’, to demonstrate every aspect of our responsible approach to business conduct and our interactions. We have set ourselves ambitious CSR targets and we maintain and implement effective CSR initiatives in the hope of inspiring others to do the same. We broadly categorise our CSR efforts into 4 key areas of focus, Governance, Colleagues, Community and Environment.
For more information about The Openwork Partnership’s approach to governance, click here.
Implementing ESG considerations at Omnis
How we approach ESG
At Omnis we take responsible investing seriously. We have a strong pedigree of research with the aim of selecting best-of-breed investment managers that are the right fit for the funds we offer to investors.
With this in mind, we have long believed that investing should be directed towards companies that operate under sound environmental and social policies with strong governance structures. In addition to the 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. This is such an important point that it is worth repeating. While we are proud of managing funds that take environmental and social concerns seriously, we are advocates of ESG investing because we believe that it should generate better outcomes for our investors over the longer term, which is our primary objective.
Investing with fund managers that share our values
One of the fundamental parts of our research process is to ensure that we only delegate management of our funds to third-party managers that share our values. We insist they are signatories to both the UN PRI and the UK Stewardship Code, which we believe represent sensible standards of ESG integration.
The United Nations-backed Principles for Responsible Investment (UN PRI) is a set of six principles developed by investors, for investors. They are voluntary, but companies choosing to sign up acknowledge that acting in the best long-term interests of their investors will involve incorporating ESG issues into their investment process because they affect the performance of investment portfolios.
In signing up to these principles, investment firms commit to incorporating ESG into their investment analysis and decision-making processes and to being active owners, engaging with the companies in which they invest on various topics in order to push for change. The UK Stewardship Code focuses more on reporting and requires that investors publish a 'statement of intent' that describes how they apply stewardship principles to their investments.
The requirement to be, and remain, a signatory of the UN PRI forms part of the contractual agreement between Omnis and our investment managers. In addition, we ask them to adopt policies to actively exercise asset voting powers over the companies in which they invest to drive positive change.
Our research process focuses on finding the best and most appropriate investment manager to run the Omnis funds. To this end, Omnis commits to:
Implementing ESG considerations at Omnis
In this interview, Rohit Vaswani, Client Portfolio Manager at Omnis is joined by Rory Maguire, Managing Director of Fundhouse to explore and discuss the topic of ESG investing in more detail – what it is and how we approach it at Omnis.
How committed are our investment management partners to ESG
Please click to enlarge the graphs
Percentage of investment firms showing forward-thinking behaviour through:
Percentage of investment firms which address ESG issues through:
How we have improved in the last six months
- A higher number of our funds are screening out non-ESG industries/industry behaviours compared to last year, most noticeably for cluster munitions, nuclear weapons and animal welfare.
- Our managers are signing up to more codes and initiatives, to be better corporate citizens. Most importantly, 100% of our managers continue to be signatories of the UN PRI.
- More asset managers are undertaking ESG engagement activities, with 100% of our asset managers engaging with firms and using proxy votes to have their view heard on ESG matters.
In analysing the Omnis funds, we look at how ESG factors are considered at both the firm level (the company running the fund) and the fund level (what ESG factors the fund manager considers).
Scoring our funds from an ESG perspective
Our independent consultants Fundhouse use a proprietary process to calculate ESG scores. We believe that these scores give a fair and balanced representation of the depth and quality of ESG activity that is taking place within each of our funds.
Firstly, they survey each of our investment managers to understand how ESG-friendly their investment approach is, including any ethical exclusions that might be applied within the portfolio. Secondly, they survey our investment managers’ firms to understand how deep ESG goes within the organisation, and how they are working to lead the industry on ESG matters. [They also measure how much ESG-mandated money the firm run globally for their clients]. Thirdly, using a specialist third-party data provider, every investment inside our funds is measured for ESG characteristics. These inputs are then blended together to create a final ESG score for each fund.
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 3 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.
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.
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
ESG ratings can provide investors with a good indicator of the overall fund. Implementing ESG factors is of course more nuanced than a simple score. Over the next few pages we will share with you real examples of ESG activities that our investment managers are engaging in.
Engaging on climate change
Jupiter manages the Omnis Income & Growth Fund and is committed to engaging with the companies in which it invests. For instance, it believes energy companies such as BP don’t need additional capital from financial markets and so reducing the pool of potential investors is unlikely to have a significant impact on company strategy. Shareholder engagement is therefore likely to be more effective in driving change at a company level, which would in turn have a positive impact on climate change.
One example of what is possible is the shareholder resolution at the recent AGM, which Jupiter co-filed. The resolution passed with near-unanimous shareholder support and requires BP to disclose how its business strategy — including each new material capital investment — is consistent with the goals of the Paris Agreement on climate change. This is a clear example of the type of stewardship that our investment managers will engage on, as responsible investors.
In February 2020, BP announced its new radical climate change strategy to achieve “net zero” emissions by 2050. BP’s mix will shift further towards fuels with lower carbon intensity. This is a good outcome, both for BP shareholders and the environment, and is unlikely to have happened if the consensus was to divest from oil and gas entirely.
You may find it interesting to watch this video from BP’s CEO Bernard Looney at BP Week 2020, where he outlines this new strategy.
Improving ESG credentials
As manager of the Omnis Absolute Return Bond Fund, Federated Hermes invests in Suzano, the world’s largest paper and pulp producer. Although the company still has room for improvement in ESG terms, it is moving in a positive direction following shareholder engagement.
After moving to a single share class, Suzano has taken steps to increase the number of independent directors on its board, from five at the end of 2019 to seven at the end of 2020. The sustainability committee now also reports directly to the board of directors, and the 2019 sustainability report follows Global Reporting Initiative (GRI) guidelines.
In addition, the firm has set a carbon-positive target that aims to capture and store more carbon than it emits by 2030. This goal also includes reducing specific emissions by 15%. All of Suzano’s production is now certified according to the Forest Stewardship Council, or comparable standard, and the company should benefit from increased demand for plastic substitutions, particularly single-use plastics.
Fidelity International manages the Omnis Global Emerging Markets Equity Leaders Fund and invests in Weichai Power, China’s largest heavy-duty truck engine maker. Although it’s in a traditionally carbon-intensive industry, the firm has made solid progress in becoming more environmentally friendly.
Structurally, the Chinese vehicle emissions standards have been upgraded so that the requirements have gone from lagging those of Europe to outpacing them. At the same time, Weichai has widened its technological leadership, with its market share expanding from 27% in 2016 to an estimated 34% in 2020.
The company has created an engine that offers 50% fuel efficiency – higher than the industry average of 45% in China and 46% in Europe – which will save users 6–7% on fuel costs. Over the next five years, Weichai is planning to gradually replace all existing products with technology that is classed as 50% fuel efficient. Recently, the firm also announced that it would be investing in fuel-efficient technologies such as fuel cell and hydraulic CVT.
Overall, Weichai is one of the top players in the global truck engine industry and the company is on the right track to solidifying its leading position given its early start on research and development on fuel cell technology.
In April 2021, the Omnis Diversified Returns Fund began making an allocation to stocks specifically linked to the theme of climate change. Listen to this interview to find out more.
Investing in positive contributors
to climate change
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.