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How ESG principles relate to investment management

Author: ICAEW Insights

Published: 07 Jun 2021

Matt McLoughlin, senior investment manager at Foresight Group, explains the importance of environmental, social and corporate governance principles and how Foresight Group integrates this into its business model

“If you went back five years, people would talk about sustainable investment as a nice thing to think about, but it was still seen as ‘nice’,” says Matt McLoughlin, senior investment manager at investment management company Foresight Group, a leading listed private equity and infrastructure investment manager.

“Now, there’s much more understanding that these things actually make businesses work better.”

For Foresight, these principles involve the broad themes of employment at scale, health, innovation and the impact a business has on its environment. These go to the core of Foresight’s business and investment model. The group invests in two areas: the first is sustainable infrastucture projects. 

“We’ve invested about £6bn in solar, wind, waste to energy, forestry and those types of projects,” says McLoughlin. “That’s a big part of Foresight Group.”

The second element is the group’s investment in small businesses across the UK. But what makes Foresight unique is its regional investment model, meaning it is not London-centric, but has offices across the country, which each invests in businesses within its own local area.

“Our strategy is to try and build relationships with small regional companies, and we have found that the best way to do that is to physically be in those regional markets and part of the communities they are in. To know the same people they know and understand the markets in which they operate,” says McLoughlin, who’s part of the investment team for the Foresight East of England Fund, operating from Foresight’s office in Cambridge.

The Foresight East of England Fund has invested in three local businesses since launching in late 2019, including one that installs and maintains fire safety equipment, another that services and repairs equipment for the utilities industry and a financial services company that focuses on sustainable planning and employee wellness.

“The objective of the fund is to be very representative of the regional market, investing for the long term in sustainable business models,” says McLoughlin. 

“The fund is largely backed by Cambridge Local Government Pension Scheme, so it’s local capital being redeployed back into the region, to create jobs and work with socially conscious companies, having a sustainable positive impact on the local community.”

Making a difference

Other than being representative of the area, Foresight also assesses environmental, social and corporate governance (ESG) principles as part of its criteria for new investments.

“We have a culture of sustainable investing,” says McLoughlin. “It’s proven that businesses that are better governed, have more diverse voices and have a better view on the sustainability of their practices, perform better and are more valuable. It’s a core part of our investment selection.”

In practice, that means doing a formal assessment on where businesses are against a range of ESG metrics before investing, and again every quarter after investment to demonstrate progress over time. These principles include reporting on gender diversity, equal opportunity and inclusion at all levels of the business, job creation, as well as environmental impacts like carbon emissions. However, the business doesn’t just invest in green companies, or those that have leading ESG credentials at the point of investment. To Foresight, it’s about culture and potential. 

“We make around 20 to 30 new investments a year, but at the same time we see 1,500 business plans a year as a team. We’re seeking to work with people who share our values and who we can build a strong relationship with. That tends to mean their aspirations around ESG features are at least similar to what we’re trying to achieve,” says McLoughlin.

“After we invest, we take a position on the board of the companies we invest in, so we have a role in setting the agenda for the business,” he adds.  

Ultimately, the group would like to leave the businesses in better shape than when they invested. 

“What we’re trying to do is see positive development across different ESG features in the companies that we invest in so that when we eventually exit or realise our investments in those companies, they’re in a better place – especially in terms of ESG — than they were when we met them,” he adds. 

“We’ve started with a very strategic focus on those ESG themes, but we’re trying to filter that down to what we do every day. That’s how we’re trying to make a difference.”