3D Methodology

How we assess 3D funds

Before conducting detailed research, we compile a shortlist of funds. This is based on a set of carefully chosen, objective criteria that include ethical suitability, financial track record, ESG management, social impact, transparency, fund age and size, and risk.

Ethical suitability

Individual investors have individual ethical outlooks and to be sure of meeting these concerns, additional checks may have to be made. However, socially motivated investors often share key values and given the need for diversification, some element of ethical compromise is necessary. By scrutinising funds on a stock by stock basis, we identify potential concerns and assess the significance of these.

One of the key principles of 3D investing is to minimise ethical compromise, so shortlisted funds would be expected to exemplify best practice within their sector by limiting the exposure to controversial stocks. These might include mining, fossil fuels, banks, animal testing, nuclear power, controversies over human rights, intensive agriculture and military contracts.

Financial track record

The objective of 3D investing is to deliver financial returns commensurate with investor expectations whilst maximising social impact and minimising ethical compromise. This means that the objective is to achieve financial returns in line with, or better than, benchmark returns for each asset class, and without taking excess risk. By their very nature, ethically screened or thematic funds won’t hug more general indices and will experience times when they under or over perform the index. This is to be expected, but over the longer term (> 5 years), we would expect performance to be in line with comparable indices. Consideration is also taken of absolute performance, consistency and volatility, the overall aim being to avoid unpleasant surprises.

SRI Capability

This is critical where value judgements need to be made, particularly where the fund contains ethically controversial stocks. It is less important for thematic funds, which, by their very nature, invest in specific areas that make a positive social impact. At the base level, funds may employ an external agency to conduct ethical screening, but we look for more than this. We prefer teams with the capacity to assess complex ethical issues which requires a significant internal research team and a well thought out methodology.

Social Impact

The other major aspect of our philosophy is maximising social impact. We interpret this to mean the percentage of the fund held in socially or environmentally beneficial companies, including clean energy, resource efficiency, clean air and water, healthcare, education, public transport, safety, sustainable food and agriculture, social housing and inclusive finance. The highest rating is reserved for unlisted investments since this generally involves making something new happen by introducing new capital.

Transparency

Transparency is a key element of 3D investing. At the very least we need to know what a fund invests in and not just the top ten holdings. A ‘black box’ mentality whereby managers claim commercial confidentiality, is the very opposite of what we are looking for. 3D investing seeks to reconnect investors with their money so an open, understandable process and clear communication is vital to properly understand the reasoning of the managers in addressing difficult ethical issues. We therefore apply a higher rating to funds with a very clear rationale and that provide ongoing evidence of their engagement, decision making and reasoning for specific investments.

We seek to maximise social impact

Risk

There are different risk factors for different types of assets and where possible we seek out assets that reduce risk whilst maximising social impact within a given asset class. Given the inevitable variance from conventional benchmarks, a greater degree of short-term volatility is to be expected, at least amongst equity funds, but we seek to identify key risks as follows:

Equities – We consider both high and low risk investments, as the overall balance of the portfolio can be adjusted to match an investor’s profile. However, in order to determine the inherent risk of an investment, we look at the volatility, market capitalisation distribution, number of holdings and other portfolio metrics.

Fixed Interest – There are limited numbers of funds, especially those with a higher social impact, so there is limited scope to be too prescriptive in terms of credit duration, quality and geography, but we look for diverse funds, chiefly consisting of investment grade credit.

Infrastructure & Real Estate – A low premium to net asset value is preferred all other factors being considered. Also we look for low levels of gearing and predictable income flows underpinned by long term contracts with some form of backing from UK government.

Public infrastructure benefits from predictable long-term revenues

Fund size and age

Words are fine, but seeing is believing. We prefer funds with a track record of at least 5 years, since this gives us a much higher level of confidence in the fund management. This doesn’t preclude funds with a much shorter track record, but this means that there has to be a very good reason why they might be preferred to more proven funds. This could be by virtue of a compelling and very different investment strategy, or by previous success in other areas.

It is very difficult for small funds to be profitable and only larger funds can sustain a credible social investment team. We therefore prefer funds of at least £50 million in size, although smaller funds may make it on to the shortlist if they can demonstrate that they are sustainable at a smaller size or are likely to grow quickly.

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