Epworth Investment Management is a specialist ethical investment manager which places Christian belief at the heart of its fund processes.
Wholly owned by the Central Finance Board of the Methodist Church, and responsible for approximately £1.5 billion, it’s debatable whether the current appetite for environmental, social and governance (ESG) focused funds is satisfied by Epworth’s investment philosophy.
This, however, may be a moot point due to the limits of fund availability. Epworth is responsible for seven charity authorised investment (CAIF) funds, non-UCITs strategies overseen by the Financial Conduct Authority (FCA), and its investors chiefly consist of religious groups, social institutions and charities, reducing its access to the vast flows of finance in the retail investment world.
Nevertheless, Epworth has opened funds to the broader investment community in the past. Last year, fundeye profiled a strategy that was only available to philanthropic foundations for over a decade, before broadening its base of investors. It has since managed to maintain a high performance level, even during a torrid year defined by the instability of the global pandemic.
Meanwhile, Epworth’s Christian sense of conviction and moral purpose has also inspired it to get involved in activist actions with its investee companies.
Last year, it wrote to Ted Baker to demand an investigation into allegations of inappropriate behaviour from the now-departed executive Ray Kelvin. These allegations including the ‘forced hugs’ scandal did come off the back of numerous profit warnings and an auditing mishap which resulted in the struggling retailer saying it would let go of 500 staff in July. Perhaps on top of Christian morality issues, there was some actual business scrutiny going on.
More recently, in September of this year it was the first fund manager in the UK to be awarded the Fair Tax Mark, which signified its payment of the correct levels of corporation tax.
In May, Epworth unveiled its Climate Stewardship Fund for Charities (CSFC), designed to tackle what the Christian asset manager describes as the ‘climate emergency’, a phrase popularised by the United Nations and the Paris Agreement in 2015.
The United Nations Environmental Programme defines the emergency as the increased global temperatures caused by human activity, which may cause the earth’s temperature to rise considerably by 2100. The UN has a goal of just a 2 degrees C increase by that time.
It is on this basis that the fund seeks to operate, combining the secular internationalist goal of reducing man-made emissions with its Christian foundation and beliefs.
What makes a Christian climate stewardship fund any different to an ESG fund?
Aside from a religiously motivated sense of mission, and the fact it is only available to charities, it might not be easy to distinguish a Christian fund from any conventional ESG or ESG-compliant strategy.
Stephen Beer, chief investment officer for the investment management group, told Fundeye that what separated the fund from the highly saturated world of sustainability strategies was the breath of its exclusion practices, alongside its engagement capabilities.
He said: “We are chasing clients who want to exclude significant exposure to greenhouse gas emissions, and want to no involvement with fossil fuel companies at all, and that is different from some conventional ESG funds, and even some of our funds, which take the climate emergency seriously and exclude stocks.”
It is worth noting CFSC does not simply exclude stocks in the manner of lots of ESG focused funds. It targets income and capital investment growth over a minimum period of five years, predominantly investing in UK companies.
The fund will target a carbon footprint at least 15 percent below that of the FTSE All Share Index by seeking to invest in companies that will help the transition to a lower carbon economy and by engaging with portfolio companies to encourage more action to reduce the risk of climate change. It excludes companies that extract or refine fossil fuels, and which have a material involvement, such as 20 percent of turnover, in the supply of fossil fuel extractives and refining industries.
It assesses the overall emissions in the portfolio collectively when making investment decisions on holdings and stocks, and excludes companies which are not just emitting greenhouse gasses into the atmosphere, but that are exposed to other companies, or involved in industries, that are. While multiple ESG-compliant funds can justify fossil fuel companies that are reducing emissions, the CSFC removes the entire sector from its selection process.
In his view, Mr Beer believes this helps the fund stand out from the crowd for Epworth’s clients while even differentiating it from the other six CAIFs it oversees.
Commenting on investment appetite for the fund, he explains: “We already had clients and potential clients in the same field who were interested in our ethical investment approach overall. They just did not want to have some of the big six energy companies or all fossil fuel companies.”
The fund will have something of a ‘stick and carrot’ approach looking to engage constructively with companies it believes have great investment and sustainability potential but are coming short of Epworth’s objectives.
Citing examples, he says: “We will engage with banks on the support they give out to the fossil fuel sector. It is a fund that doesn't have exposure to the fossil fuel side of things, but is also run by a team of people not just focused on exclusion. It is seeking to engage as much as we can, and looks to construct a portfolio with emissions in mind.”
Can you be green without the green industry?
The religious aspect of this fund’s investment mandate makes it certainly standout from the numerous ESG products that have been launched this year. Throw a rock in the Square Mile and you will hit an investor looking at emission-reducing strategy. Only recently, Dutch asset manager Robeco, responsible for over EUR 20 billion, extended its exclusion of investments in all fossil fuels to the entire range of its funds.
Instead, where it stands out is possibly in the stocks it has invested in rather than what it has excluded.
Currently, the fund consists of 66 holdings, with an overall size of £28.1 million. Epworth collectively labels it with a risk rating of 4 out of 7, the middle score in its ranking system
Requiring an initial investment of at least £1,000, with a management fee 0.65 percent, it is heavily weighted towards stocks it defines as ‘defensive’ which consist of 40 percent of the portfolio. The three other sectors completing the portfolio are financials (33.8 percent), cyclicals (24.7 percent) and cash (1.5 percent). With daily valuations, it is on course for a net yield per annum of 2.7 percent.
Among its top holdings are well-established names listed on multiple indices. Alongside consumer-focused industries such as the Vodafone Group (5.5 percent), Unilever (5.4 percent) and Tesco (3.9 percent), the National Grid (3.9 percent) and Prudential (3.6 percent) also featured in its top 10 holdings. At the top of the list are well-known pharmaceutical giants Astra Zeneca (6.1 percent) and GlaxoSmithKline (6.0 percent).
Part of this investment approach is defined by the need to mitigate risk, with the bedrock of familiar names part of what Mr Beer describes as the anchor section of the portfolio. The core portfolio exists to reduce instability, provide a defensive structure and has the largest holdings in the index. The fund also has what it deems ‘a conviction section’, which is about a third of the size of the overall fund and contains the fund manager’s best alpha generating ideas.
This is not however, to suggest Epworth are opposed to exciting opportunities. Instead, rather than pushing for investment at the forefront of the burgeoning green energy sector and sustainable infrastructure, it prizes UK companies that are high-performing and environmentally friendly across all the domestic sectors.
Mr Beer explains: “We are looking for stocks which, in one way or another, contribute to reducing the global temperature and to the positive transmission to a low carbon world. This does not have to be necessarily, renewable energy exposures, this could be companies that are particularly efficient in their own section, and are innovative in that in that way. Those are stocks where we think they are making a particularly positive contribution to the climate agenda.”
It is this philosophy that marks out the asset manager. Its Christian sense of every company no matter its purpose, being able to contribute to the effort to reduce greenhouse gas emissions.
