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An integral piece of the puzzle
DEPENDING on whom you speak to, sustainability and ESG factors (environment, social and governance) could be an integral part of portfolio management. Or, they could be isolated as a specific choice that investors could adopt or set aside for another day.
The LGT Group, owned by an entrepreneurial family, the Princely House of Liechtenstein, is firmly in the first camp. Set up more than 90 years ago, the private bank and asset management firm, with assets under management of about 201 billion Swiss franc (S$274.4 billion) as at end-2017, has decisively set itself on the path of sustainability.
The family, with a long provenance of building and managing assets for around 900 years, has been an early adopter of sustainability. But other factors are rapidly converging to fuel more widespread interest and engagement, says LGT Impact partner (Asia Pacific) En Lee. These include an increasing preference among institutions and younger millennial clients to invest sustainably.
Says Mr Lee: “Sustainability is hot-wired into the DNA of the family and the value system of the firm. Whether it’s private bank, asset management or direct impact investing, we have the same value driver.”
“The best way for stewardship is to walk the talk. LGT’s shareholders are aligned with sustainability. Clients who want to work with us come because the values are aligned. It’s a strong differentiating factor, that we are family-owned, with a strong value system and are early adopters of sustainability.
“If you look at the context – rising inequality, climate change, environmental degradation and so on – sustainability is no longer an option but an imperative whether it is doing business or investing ... When the concept started, it was about risk mitigation. Now the mindset has changed; it has gone to value alignment and value creation. Individuals and families are looking at meaningful factors to create long-term value and to align their value systems with their investments.”
The attention that the UN Sustainable Development Goals, a set of 17 goals spelt out by the UN in 2015, has also helped to create a groundswell of support among fund managers, investors and philanthropists to mobilise capital and work with governments to achieve the goals.
The LGT Group is active across a number of segments in the sustainable investment spectrum. In asset management under LGT Capital Partners, the group manages roughly US$6.2 billion in dedicated sustainable investment solutions. This includes US$4 billion in multi-asset and customised institutional and ultra high net worth mandates across all sustainable strategies.
The funds exclude “sin” activities such as pornography, gambling, arms and child labour. It uses a proprietary tool, LGT ESG Cockpit to assess securities’ key performance indicators in ESG categories. More recently, in 2017, it introduced the LGT Sustainability Rating for equities, bonds and ETFs to help clients in their investment decisions.
Quite apart from market securities, LGT has long engaged in private market efforts, working with organisations and enterprises to create a long term positive impact. LGT Impact and LGT Venture Philanthropy were established in 2007, and have since supported over 60 organisations across Africa, Latin America, Asia and Europe, in the areas of healthcare, education, agriculture, renewable energy, ICT and financial inclusion. To date, over US$150 million has been invested to improve the lives of more than 5.5 million people.
LGT Venture Philanthropy is structured as a foundation and makes philanthropic investments either in non-profit organisations or in companies and projects with a risk/return profile that does not correspond with traditional investment strategies.
LGT Impact invests in organisations that combine positive financial returns with strong and clearly measurable social or environmental added value. It distributes the capital gains, dividends and interest to the investors.
One example of an enterprise that LGT supports is M-KOPA Solar in Kenya which provides affordable off-grid solar home systems in Africa, using an innovative pay-as-you-go model. Customers activate the solar home system by making daily payments via cell phones. To date the company has powered close to 700,000 homes in Kenya, Uganda and Tanzania.
LGT has tapped private capital to help fund M-KOPA’s efforts. It structured, for instance, a short- term note to help provide funding.
Another company that LGT supports is Kennemera Foods International, which enables small- holder farmers in the Philippines to switch to growing cacao. Kennemera provides farmers with cacao technology, seedlings, fertiliser and training to ensure a market for their produce.
To date, KFI has helped more than 20,000 smallholder farmers in rural Philippines, who have planted more than 17 million trees and increased yields by up to 300 per cent.
To investors who want to explore impact investing on their own, Mr Lee says it is a “contact sport”. “You have to be in the field to play. There are six key processes – sourcing and screening for deals, due diligence and execution, post transaction monitoring and exit. It’s hard for foreign investors to source good deals. The real risk is what happens after you make the investment – you need management and monitoring, value creation and relevant expertise to help it scale. You can’t do these remotely.”
For clients who would like to test the market, it may be best to start with a professionally managed impact investment fund.
Mr Lee says the research on an impact fund is similar to that for any other traditional fund. “Investors have to be comfortable with the strategy – is it global, regional or country focused? And which sectors or themes – is the focus on climate change, poverty alleviation or gender equality? You should assess the team based on the investment strategy, relevant track record and ability to execute impact investments. You need strong local knowledge and expertise to deliver a sustainable triple bottom line (social, environmental and financial) returns.” W