Investing Ethically with Parmenion An Adviser Guide

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1 An Adviser Guide Ethically influenced purchasing decisions are now firmly established as part of everyday life. The use of labels such as fair trade, organic, ethically traded, recycled, sustainable and low carbon emissions is on the increase, as both businesses and individuals recognise their benefits. The recent financial crisis has added to this by putting the spotlight on previously low profile governance issues like executive pay and corporate taxation. As a result consumers are increasingly well informed and making decisions about the issues that mean the most to them. Similarly, companies are increasingly aware that they need to manage their reputations and consider all issues that may impact their future success. Some are ahead of public opinion, whereas others are well behind the curve in some, or many areas. Bringing Ethics into Investment Ethical investment is part of this trend. By offering funds that integrate ethical issues into fund management decisions your clients have the opportunity to reflect their own lifestyles, values and interests through their investment decisions - and to, in effect, have a say in the kind of organisations their money is invested in. Over the last 15 years, the range of ethical and sustainable and responsible investment options available to investors has expanded and broadened significantly. Ethical investors are not all the same, so Parmenion believes it is important to offer investment solutions that address the diverse needs of investors who are interested in areas such as these. This is why we recommend that all advisers include an ethical question in their standard fact find and have processes in place to meet clients ethical aims and objectives as appropriate. Example Advice Process for Clients Interested in Ethical Issues? Stage 1: Ask an ethical question as part of your client fact-find questionnaire. Stage 2: Identify clients aims and objectives and select the preferred ethical profile (A-D). Please refer to the Ethical Fact Find. Stage 3: Identify clients tolerance and capacity for loss and select the appropriate Risk Grade (1-10). Please refer to the Edgecumbe Risk Profile Questionnaire. Available on your Adviser login under Documents (Risk Profiling). Available on your Adviser login under Documents (Risk Profiling) Stage 4: Select the appropriate tax wrapper or product. Available on the Parmenion Portfolio Builder Stage 5: Recommend the appropriate ethically profiled and risk rated investment solution to your client drop-down, e.g. Ethical Grade A - Responsible Investor: Risk Grade 5. Available on the Parmenion Portfolio Builder Stage 6: Agree review process with client. Figure 1: 1

2 Our Aims and Objectives Parmenion has an established reputation for offering investment solutions that meet the needs of clients with a diverse range of risk profiles according to clients tolerance and capacity for loss. Our ethical portfolios combine this expertise with a carefully crafted structure which meet a wide range of clients ethical, social and environmental goals. Funds held within these portfolios specialise in integrating issues that are not commonly researched in detail by other investment managers. By combining the expertise of ethical fund managers with our risk focused investment management expertise we enable Advisers to offer a comprehensive range of options that meet a clients financial goals and their lifestyle preferences. Ethical Options A Business Opportunity Considering ethical investments is about more than considering your clients morals and values, it makes pragmatic business sense. With a rapidly growing segment of the market increasingly considering their ethical impact, offering a solution which can credibly meet these needs will only help to expand your client base. 82% * of consumers want financial product providers to pay more attention to environmental, social and governance (ESG) risks when deciding which companies to invest in or lend money to, as part of ensuring good financial return. Source: UK EIRIS 2011 Ipsos MORI consumer poll. Moreover, ethical clients generally tend to be more loyal towards their Adviser, as by definition they are concerned with more than just their portfolio performance. Clients that are able to invest alongside their ethical preferences also tend to be happier, potentially increasing client referrals and business revenue. What is Ethical Investment? At its core ethical investment, as we refer to this area, is a range of investment styles which go beyond simple financial return to incorporate investors ethical, social and environmental and responsible investment values and opinions into the investment process. The Ethical Investment Market Today Today, as UK retail options approach their 30th anniversary, individuals have invested around 12.2 billion (EIRIS) through ethical funds. Much has changed over the years. Options available to investors have increased from reflecting primarily values based concerns - such as tobacco, armaments and gambling - to also consider many environmental, social and governance related issues. In many ways ethical investment is just the tip of the iceberg. The United Nations backed Principles of Responsible Investment initiative, for example, now boasts over 1000 signatories with over $30 trillion (UNPRI) of assets. 2

3 Different Approaches This diverse market includes a number of distinct approaches that can either be employed on their own or collectively by fund managers. Some common approaches applied across this market are; Responsible Engagement: some fund managers focus on using their position as investment owners (mainly equity) to encourage investee businesses to improve their environmental, social and governance standards. These fund managers work with the objective of delivering better outcomes for investors and other stakeholders. Themed Investment: Themed sustainable and responsible investments focus on selecting companies in line with environmental, social or governance (ESG) themes. Some funds focus their attention on a single issue (e.g. Water), whilst others are more broad based criteria (e.g. Sustainability). Ethical Screening: Traditional ethical funds place significant emphasis on values based criteria, which considers issues such as armaments, tobacco or gambling. Funds typically apply a combination of positive selection screening or negative avoidance based screening, to avoid or select stocks that meet the specified ethical criteria. The Parmenion Ethical Profiles Parmenion has combined these diverse approaches into a unique range of portfolio options. There are four ethical profiles available (A-D), each of which has a unique style focus, and collectively they form a suit of portfolios which progress in terms of depth and strength of screening to cover the whole Socially Responsible Investment (SRI) market. Each ethical profile also offers a wide range of Parmenion risk grades (1-10), offering a client the optionality to select a portfolio appropriate to both their ethical values as well as their risk profile. Ethical Grade A - Responsible Portfolios within this ethical profile invests in funds that identify companies which are leaders in Environmental, Social and Governance (ESG) areas and in so doing encourage and support positive change across a range of responsible investment areas. * The portfolio managers will invest in funds that demonstrate an understanding of responsible investment issues and a commitment to helping to effect positive change across environmental, social and governance issues. The emphasis may be on best of sector practices and good governance rather than exclusion but most ethical and socially responsible investment (SRI) funds are likely to be acceptable for this portfolio. Selection criteria: Limits exposure to armaments, pornography, human rights issues, tobacco production and nonmedical animal testing by excluding appropriate funds according to a 50% target adherence level. Ethical Grade B - Sustainability Portfolios within this ethical profile invest in funds that hold companies which demonstrate leadership positions across sustainability and/or environmental issues. * The portfolio managers will invest in funds with strong environmental and sustainability related credentials. They are typically promoted as being environmental, sustainability themed and leading or supporting the transition towards more sustainable lifestyles. Selection criteria: Limits exposure to armaments, pornography, human rights issues, tobacco production, nonmedical animal testing and environmental degradation by excluding appropriate funds according to a 75% target adherence level. For risk related reasons significant exposure to clean technology and pure play companies is likely to be limited. 3

4 Ethical Grade C - Ethical Portfolios within this ethical profile invest in funds which have a positive or balanced agenda for investment based upon consideration of a range of ethical, social and environmental issues and select only those that are considered to be ethically sound. ** The portfolio managers will invest in funds that take a pragmatic and balanced approach to company selection in line with ethical criteria. Fund managers are expected to consider a wide range of ethical, social and environmental factors and are likely to combine positive and negative screens with best in sector considerations. Selection criteria: Excludes funds with exposure to armaments, pornography, human rights issues, tobacco production, non-medical animal testing, environmental degradation and gambling. Ethical Grade D - Traditional Ethical Portfolios within this ethical profile invest in screened ethical funds which demonstrate a clear commitment to values led stock selection strategies and avoidance in line with the specified ethical criteria. ** The portfolio managers will invest in leading screened ethical funds that offer high ethical standards across a wide range of social, ethical and environmental areas. Fund managers may typically apply a combination of positive and negative ethical screening approaches. Selection criteria: Excludes funds with exposure to armaments, pornography, human rights issues, tobacco production, non-medical animal testing, environmental degradation, gambling, alcohol production and nuclear power. Illustration of the Parmenion Ethical Profiles Impact on Fund Selection Whilst investors in Ethical Grades A and B focus on leaders in positive change, investors in Ethical Grades C and D are more focused on specific avoidance criteria. As such, the universe of available funds decreases as you move through the ethical profiles. This is not necessarily negative for investors, as funds are increasingly focused upon companies that consider their long term impact to stakeholders. Responsible Sustainability Ethical Traditional Ethical Figure 2: 4

5 FAQs How Are These Portfolios Likely to Perform Relative to Non Ethical Portfolios? Ethical and SRI options have demonstrated that over many years their performance is on a par with other comparable funds. Performance of some funds is however likely to be different from others on occasions if their ethical policies significantly influence their stock selection decisions. This conclusion is evidenced through a number of academic studies including Amenc, Sourd (2008) Socially Responsible Investment in France, Areal, Cortez, Silva (2010) Investing in Mutual Funds: Does it Pay to be a Sinner or a Saint in Times of Crisis? and Bauer et al. (2002) International Evidence on Ethical Fund Performance and Investment Style. What Risk Grades are Available The risk profiles across the Parmenion range are consistently applied across all of the ethical solutions. As such, clients can choose from risk grades 1-10 to ensure a close alignment with their tolerance and capacity for loss. How Can Ethical Investments Help Make a Difference? Investing in an ethical, responsible or sustainability focused way enables clients to direct their money towards companies that better reflect their personal values and opinions. By doing so they are actively supporting the demand for such investments and helping to send a positive message to management that their company has been selected as a result of its ethical credentials. Funds which are subject to responsible engagement strategies also provide the additional benefit of discussing such issues with management and calling for higher standards. How does Parmenion Determine which Funds are Eligible within the Ethical Profiles? Assessing the suitability of the underlying funds, is the responsibility of the Ethical Oversight Committee (EOC), which includes a number of industry specialists with significant experience in this area. To assess compliance of funds to ethical screens, we use the services of a range of ethical research providers. We then apply a qualitative overlay, which assesses the fund suitability in terms of the ethical policy of the fund managers and their investment strategy and experience. These are then combined with detailed financial fund analysis to create a potential investment universe for the portfolios from which the investment manager can select. Ongoing monitoring of the funds within these portfolios is essential as change in this area is continuous. This is why we have an Ethical Oversight Committee dedicated to reviewing the Parmenion ethical portfolios on a quarterly basis. Members of the Ethical Oversight Committee include:- Julian Parrott Julian is actively involved in the Ethical Investment Association (EIA) and UK Sustainable Investment and Finance (UKSIF) Association having previously held the positions of Chairman and Director respectively. With over 20 years experience investing ethically, Julian provides a high degree of assurance and credibility. As an acting Adviser, Julian is able to offer unique insights which can greatly assist in client discussions. Julia Dreblow Julia has 24 years experience in financial services, with close to 20 years specialising in SRI, ethical investment. Julia managed the Friends Provident SRI proposition from 1996 to 2008 which included the Stewardship funds, now managed by F&C. Julia was also a director of the UK Sustainable Investment and Finance (UKSIF) Association from , helping to shape the SRI sector today. She now runs her own consultancy business - sriservices. Andrew Gilbert Andrew is the investment manager for the PIM Ethical portfolios, with the support of PIM and overseen by the Parmenion Investment Oversight Committee (IOC). For further details on Andrew s experience and qualifications please refer to the PIM website at 5

6 Further Information For further information on our ethical documentation, or any aspect of this process, please refer to your Parmenion relationship manager and we will be happy to assist. Important Information * Ethical Grades A and B include exposure to UK Government Bonds and UK Direct Property for the purposes of diversification. Whilst Property funds within this asset class offer a strong policy of ethical governance, their criteria would not fit within Ethical Grades C and D, and as such they have been excluded. ** Please note that exclusion and avoidance criteria does not always mean zero involvement as most ethical funds have deminimus limits which allow for limited (normally non-manufacturing/wholesale related) exposure to some excluded areas. This allows funds to be manageable and support otherwise positive larger companies. Disclaimer This document is only suitable for professional distribution. Parmenion Capital Partners LLP is authorised and regulated by the Financial Conduct Authority. FCA number Parmenion Capital Partners LLP: Registered in England OC Registered Office: 2 College Square, Anchor Road, Bristol, BS1 5UE. Office: Website: Head Office: 2 College Square Anchor Road, Bristol BS1 5UE. Website: Parmenion Investment Management Ltd is a subsidiary of Parmenion Capital Partners LLP. Parmenion Capital Partners LLP is authorised and regulated by the Financial Conduct Authority, registration number: