How EdenTree's Hiorns puts stocks to the ESG test

Advisers should be offering ethical options to clients, according to EdenTree Investment Management senior fund manager Chris Hiorns (pictured). He runs the EdenTree Amity Sterling Bond Fund (see performance graph).

Speaking to Ollie Smith at the New Model Adviser® Conference and Awards 2019 Hiorns, who manages three ethical funds in the UK, says clients may not be aware of opportunities to invest responsibly.

Analysing the full supply chain and scrutinising businesses form the basis of Hiorns’ investment choices across his fixed income, equity and mixed asset funds.  

(Hiorns' charity fund is ranked 98/293 over five years to 31 December in the in Citywire’s Balanced GBP sector, returning 23.9%, just above the average manager’s 20.4%.)

How do you make sure an investment is ethical in a global supply chain?

In terms of the funds I run in UK fixed interest, we are looking at companies that operate in the UK. Although they may be based there, they may be sourcing goods from outside the UK into the developed markets, so you want very high standards in terms of labour, health and wellbeing.

You want to make sure their suppliers allow unionisation, pay living wages, and there is no child labour or bonded labour in their supply chain.

You manage the Amity European fund. Where are the investing opportunities in Europe?

One area people are concerned about at the moment is waste and the impact that is having on our ecology. Liquid packaging tends not to be very recyclable because it has a plastic coating over the paper, which means it needs to go to specialist plants to be recycled.

BillerudKorsnäs (a Swedish paper manufacturer we invest in) is looking to change the technology and remove the plastic coating so the packaging is recyclable. 

You run ethical bond funds. How safe are bonds at the moment?

Monetary conditions remain very loose in the UK at the moment. We have very low interest rates despite the fact we have had two rate rises, so a concern for bond investors is we may see rising interest rates and rising bond yields, which would have negative impacts on capital values.

But we have reduced the duration of our portfolios so they are less exposed to rate rises that could come through towards the end of this year and moving into 2020.

How do you identify opportunities in the charitable bond sector?

You have to be careful. You do not want to invest in charities where there is not a good business case for taking out this kind of financing.

We look for good business plans, which are always asset backed, so there is a strong guarantee for you as an investor that you will get your money back. But also for the charity that there are strong cashflows coming off these investments, which will allow them to repay those loans.

Charities have not been immune from accusations of unethical practice. Do you have one eye on that?

Hopefully we have both eyes on it. When we engage with charities prior to the launch of a bond we talk about the investment case, but also about how they manage their own reputational risks and their working conditions.

We will treat them the same as any other business in that respect. We look for charities that pay the living wage, for example, and value their employees. 

What is stopping people from investing ethically?

People are perhaps not aware of the opportunity to invest in responsible and sustainable funds. When they go to their IFA, they may not have this as a priority.

Traditionally, I think people have thought if they did invest in a sustainable manner, this would have an impact on their returns or maybe increase risk in their portfolios. This is absolutely not the case in terms of making long-term investments.

Should IFAs be required to make some sort of formal assessment of a fund’s ethical credentials before making a recommendation?

Having a complete offering for clients should be positive for any IFA, so from a business point of view I would have thought they would want to offer a sustainable solution as an option. I would not necessarily advocate further regulation, but I definitely believe IFAs should be offering this to their clients.