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Viewpoint - Jamie Cumming, Aberdeen Asset Management

27 July 2015

The fund manager on how his team screens companies to ensure they meet their criteria for ethical investment, and the investments they steer clear of.

Can you explain your approach to ethical investing?

The core of our approach has always been bottom-up, doing proprietary research so that we can understand the mechanics of the company. Corporate governance has always been an important part of what we look at in a company. The ethical screening is looked at on top of that; we take the same approach as we do in our fundamental company research but it is carried out by our Socially Responsible Investment (SRI) team. So it is very much fundamental corporate governance analysis balanced with ethical criteria.

Historically, religious and charitable organisations had specific elements they did not want exposure to (known as ‘negative screening’). This is always likely to be a part of the market but the approach has evolved, just as the description of ethical investing has evolved to encompass titles like SRI. Ethical investing has now moved towards corporate citizenship; ethical risk factors are more important in today’s climate and are increasingly being incorporated into mainstream investment, which is part of what we do on a daily basis.

How does the process of screening companies work?

Our SRI team, headed by Cindy Rose, includes four analysts. They will also work with the investment research teams, who are in daily contact with the companies on a global basis, perhaps asking them to raise some SRI-based questions at company meetings. The SRI analysts also carry out their own visits. Those on our buy list will have been screened by our SRI team, so will have been pre-approved.

Which is more important – the ethical or the investment case?

The investment case is the first aspect we look at but certain elements within SRI – such as corporate governance – are now mainstream business issues. There has been a blurring of the boundaries; things once considered softer SRI areas are getting more and more mainstream. For example, the environment and the increase in legislation in this area, labour practices and health and safety. These are all fundamental to how companies conduct themselves. The investment case has to be there, but we will be overlaying that with the ethical criteria to hopefully get the best of both in the companies we put into the portfolio.

The origin of ethical investment was in negative screening. Does this type of ethical investing still have a place?

Negative screening will always be important to some investors. There are some things that our fund will not invest in, such as firms that earn the bulk of their income from alcohol, weapons, tobacco and gaming. But that means we will not be prevented from investing in, for example, an energy company simply because it has forecourt shops which sell tobacco.  

Engagement with companies is an important part of Aberdeen’s ethical approach. Can you explain how this works?

It is an evolving process. We hope to see companies, from an SRI perspective, adapting their policies, addressing the risk areas and ensuring they have a handle on the key issues facing the business. For example, with mining companies we want to be sure that they understand what the key risks are – such as health and safety, labour issues or the environment – and have the systems to address them. Do they have key performance indicators in these areas? How are they linked to management performance criteria? For example, Swire Pacific, a Hong Kong-based conglomerate, has over the past 10 years been bringing more and more of these factors into the culture and fabric of the business. We hope to see that in companies as the boundaries between ethical and ordinary investment become more blurred.

Do investors have an obligation to encourage companies to improve their behaviour?

We engage with companies on a daily basis so that we can understand the structure of the business, its strategy and its corporate governance systems. Our SRI team also engages with them so that it can understand their processes and policies. We’re not trying to change the behaviour of the companies we invest in; we invest in companies which we are comfortable with at the outset.

The opinions expressed are those of Jamie Cumming. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice.

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