What is HL doing to invest responsibly?

Our vision for ESG - environmental, social and governance - is to inspire confidence for our clients to invest for a sustainable, resilient, and successful financial future.

ESG factors make up an increasing part of the analysis process in how we select funds to be included on our Wealth Shortlist. The Wealth Shortlist is a list of funds selected by our analysts for their long-term performance potential. It’s designed to help investors build and maintain diversified portfolios. We meet all Wealth Shortlist fund managers at least once a year, and ESG has naturally become a bigger part of those conversations. Following each fund manager meeting, we consider whether the manager is fully taking account of the ESG risks applicable to their portfolio, and if they’re supported to do so by the fund group they work for.

HL funds also use an ESG-integrated investment process to invest in sustainable and resilient businesses which help generate sustainable revenues, profits and dividends.

The HL funds are managed by our sister company, Hargreaves Lansdown Fund Managers Ltd (HLFM).

HL fund managers have been integrating ESG factors into their investment processes for a number of years now. However, ESG best practice is continually evolving, and our ESG Investment Policy strengthens our commitment here. It helps make sure HL is using its influence to help build a better future for everyone.

Here’s a closer look at the key things they’re doing to invest your money responsibly across the HL Portfolio Building Blocks, HL Portfolio funds and HL Select range of funds.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice.

Exclusions

Exclusionary screening (otherwise known as negative screening) means avoiding companies, sectors or countries on the basis of moral values, standards, or norms.

Where possible we prefer to engage rather than exclude. Simply excluding companies from the investment universe will prevent us from helping them become more sustainably run enterprises. It also often results in a transfer of ownership to private markets where they won’t be held to account.

However, some businesses engage in practices that damage society or the environment to the point where they constitute an unacceptably high risk to investors.

These companies typically pose greater investment risks as they could be hit with large fines, increased costs, or reputational damage. Some might even be left with ‘stranded assets’, those which become devalued, or uneconomical to use, because of regulatory change or changes in demand.

Across the HL Select Funds and the segregated mandates held within the HL Portfolio Funds and HL Portfolio Building Blocks, where they directly manage the assets, the following exclusions are imposed.

Thermal coal power generation and extraction

Coal power is responsible for a significant proportion of the carbon dioxide emissions created. Rapid emission reductions are needed to satisfy the global commitment to limit emissions made under the Paris Agreement, and this starts with removing coal from the energy mix.

Companies that derive a significant percentage of their revenue from thermal coal could be disproportionately affected by a shift away from coal.

The HL Select fund managers and appointed managers of segregated mandates won’t invest in companies that generate 20% or more of their revenues from thermal coal power generation and extraction.

Oil sands extraction

The overall emissions footprint of oil sands is significantly higher than the norm for the oil industry. Oil sands production is also related to a number of other environmental and human rights concerns, including air pollution, rising cancer rates, and abuses of Indigenous Peoples’ collective human rights.

Companies involved in these actions run the danger of having their reputations damaged and are more likely to incur future liabilities.

The HL Select fund managers and appointed managers of segregated mandates won’t invest in companies that generate 20% or more of their revenues from oil sands extraction.

Controversial weapons

Controversial weapons are those that have a disproportionately negative humanitarian impact on the civilian population, the consequences of which are frequently felt for several generations after armed conflicts have finished. These include biological and chemical weapons, cluster munitions, and antipersonnel landmines.

The HL Select fund managers and appointed managers of segregated mandates won’t invest in companies that generate revenues from the production, maintenance, sale, or research and development of controversial weapons. They also won’t invest in components or services that are considered tailor-made and essential for the lethal use of the weapon.

United Nations Global Compact violators

The United Nations Global Compact (UNGC) is a set of ten internationally endorsed standards on human rights, labour, the environment, and anti-corruption. They were developed to inspire companies all over the world to embrace socially and ecologically conscious practices.

Companies whose actions violate these standards could pose greater investment risks as a result of poor governance and management of their own operations. This could seriously harm their reputations and create future problems.

The HL Select fund managers and appointed managers of segregated mandates won’t invest in persistent violators of the UNGC principles. A ‘violation’ occurs if a company is in breach of at least one of the UNGC principles for a continuous period of three years.

Third-party funds

Where HL fund managers invest in third party funds, they don’t have the power to enforce exclusions. This can happen within the HL Portfolio Funds and HL Portfolio Building Blocks fund range where segregated mandates aren’t in place.

We also aren’t able to enforce exclusions in the funds listed on the Wealth Shortlist, because these are third-party funds.

Instead, we commit to engaging with third party fund managers who invest in companies that would otherwise breach our exclusions criteria. We then report the results of our engagement to investors through our annual engagement report. For Wealth Shortlist funds, a summary of our engagement with the funds’ managers can be found in our annual updates for the individual funds.

Net zero

Net zero means cutting greenhouse gas emissions produced by human activity to as close to zero as possible, with any remaining emissions reabsorbed from the atmosphere, by oceans and forests for instance. Reducing emissions is vital to making sure we avert the worst impacts of climate change.

All third party fund managers across HL’s range of funds and our investment solutions, such as the Wealth Shortlist, must pledge to net zero by 2050 or earlier and to be working towards creating a robust transition plan to support this pledge. Those that haven’t set a decarbonisation target will face divestment from HL funds after a two-year engagement period if they don’t comply, or for Wealth Shortlist funds could face being removed from the list. We’ve already started engaging with those fund groups who are yet to pledge to net zero by 2050 and are monitoring their progress regularly.

Principles for Responsible Investment

The Principles for Responsible Investment (PRI) is a commitment to adopt and implement the six principles, listed below.

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Principle 6: We will report on our activities and progress towards implementing the Principles.

All the fund groups HL Fund Managers invest with, and those on the Wealth Shortlist are expected to be a signatory of PRI, or if not applicable, their country equivalent commitment to responsible investment.

We’ll engage with groups that don’t comply over a period of two years and funds ultimately face the risk of divestment from HL funds or exclusion from the Wealth Shortlist if they don’t come up with a solution.

HL Fund Managers has been a signatory to the PRI since 2021.

Stewardship

Stewardship involves the active oversight of investments and can include a range of activities, including due diligence research, engagement and voting. Effective stewardship can contribute towards sustainable, long-term value creation for investors.

A key way stewardship is delivered on the HL Funds is through ESG risk monitoring. We obtain insights which allow more informed engagement, investment, and divestment decisions on behalf of clients. We do this through due-diligence questionnaires, regular fund manager and company meetings, and ongoing quantitative and investment risk monitoring.

Our in-house ESG Analysis team contributes to ESG risk monitoring and oversees our analysis processes. Our Stewardship and Engagement Policy strengthens our engagement, read our policy here.

Engagement

We engage with the companies we invest in, and the fund groups we invest with, in order to influence policies and behaviours to the benefit of long-term investors.

Here’s what our engagement process looks like:

• We have committed to collate themes for engagement every two years through client surveys. We aim to understand the issues our investors care about most and focus our engagement on driving positive outcomes in these areas.
• To ensure our engagement is effective, we define specific engagement objectives informed by our ESG data and supported by the ESG Analysis team. These are then shared with investee companies or fund managers, and we then track progress against these engagement objectives over time.
• We can engage in a variety of ways, such as corresponding with companies via email, holding meetings with fund managers, investor relations teams, executives, or Board representatives, alongside site visits. In all cases, dialogue must be consistent, direct, and honest.
• If fund managers of segregated mandates or companies fail to respond positively to our engagement, we will seek additional meetings, join collaborative engagement schemes and vote against management.
• Should this escalation fail to invoke meaningful change within a time period set by our engagement framework, we will review our investment thesis and, where relevant, consider divestment.

Voting

Participating in proxy votes is an important way for active investors to use their bargaining power to push for positive change and influence corporate behaviour on a range of issues.

HL fund managers always look to vote at meetings of the companies they hold in the HL Select Funds, unless they’re in the process of selling out of the share. They take advice on voting from Institutional Shareholder Services (ISS), who have a long track record of monitoring and advising on corporate governance best practice.

Within the HL Portfolio Funds and HL Portfolio Building Blocks fund range, we delegate voting responsibility to the underlying fund managers.

Want to learn more?

If you want to learn more about responsible investing, explore our responsible investment section.

It includes helpful tips and tricks to investment ideas to help you get started investing responsibly.