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What do we mean by responsible investment?

26 July 2021 Stock Stories, Sector Insights, Investment Styles, About Alliance Trust, How to Invest Alliance Trust

As the wave of interest in investing in a sustainable way washes over financial markets, a whole new lexicon has emerged to explain what it all means.

Sustainable. Ethical. Green. Impact. Responsible. On the surface, each labelcould be taken to mean pretty much the same thing, but they all have their own nuances and meanings, and will result in quite different approaches to investing. For example, a fund describing itself as ‘green’ or an ‘impact’ fund may aim to invest in sectors that protect or improve the environment, while an ‘ethical’ fund may take a moral position against so-called ‘sin’ stocks, such as tobacco or gambling companies.

In our case, responsible investing is a broader term, which implies a more pragmatic and open-minded approach to what stock we will own in the portfolio. We believe it best matches the mindset of a long-term, patient investor seeking to improve returns over the long term.

Active ownership

Central to being a responsible, longterm investor is a consideration of the environmental, social and governance (ESG) factors that can help or hinder a company’s financial returns, and hence its investment potential. We believe a key component of the approach is being an active owner, engaging with companies to develop and improve their approach to ESG issues, such as diversity, executive pay or carbon emissions, as opposed to simply excluding them from the portfolio. A responsible investor believes that paying attention to improvements from an ESG standpoint, will mean a company is more resilient and less likely to suffer earning shocks and harsh market reactions. 

Ultimately, adopting this approach does mean that a portfolio may include a small number of stocks that some investors may question.

However, we believe it is often better to engage with a company, to encourage it to make improvements, consider the impact of its work, and apply pressure to change its approach and improve outcomes, even if its current ESG profile leaves something to be desired.

“We believe steering companies with more questionable track records or in ‘dirtier industries’ towards sustainable practices, should help to manage risks over the long term, improve returns and benefit the planet,” says Craig Baker, Global Chief Investment Officer at Willis Towers Watson (WTW) and Head of Alliance Trust’s Investment Committee.

To help illustrate this, two of the largest contributors to our portfolio’s carbon footprint are HeidelbergCement and steelmaker ArcelorMittal.

Carbon reductions

HeidelbergCement is a global leader in aggregates, cement and ready-mixed concrete production. The main component of cement is clinker, a by-product of sintering limestone, and its production is carbon-emission-intensive. Unsurprisingly, the carbon problem is one felt across the entire cement/concrete industry, with production accounting for 8% of the world’s carbon emissions.*

However, cement is also the most widely used construction material globally, and its use will likely increase due to growing urbanisation and increased infrastructure spending globally. As a result, we believe engaging with companies such as HeidelbergCement is important for ensuring key industries are taking the right steps to transition to lower carbon emissions.

Our Stock Picker, Bill Kanko of Black Creek, along with EOS – which bolsters the Stock Pickers’ efforts by engaging with companies collectively on behalf of asset owners such as Alliance Trust representing $1.5 trillion** of investment capital – has actively worked with HeidelbergCement on many ESG-related topics. The outcome of these efforts exemplifies what we see as the benefits of engaging, rather than excluding, carbon-heavy industries.

To date, HeidelbergCement has made strong progress, and has been increasingly focused on growing its share of the market’s sustainable low-carbon products. It is designing factories that operate with alternative raw materials and fuels. Currently, HeidelbergCement allocates about 80% of its R&D spend on reducing energy consumption in its manufacturing process. In June 2021, it announced plans to build the world’s first carbon-neutral cement plant in Sweden; this is expected to start operations in 2030.

In 2019, HeidelbergCement became the first cement company to announce an emissions reduction target that is in line with the Paris Climate Agreement, which aims to prevent a rise in the Earth’s temperature over 2°C by 2050. When compared to its peer group, this clear commitment to ESG is evident in its ranking. Under the index provider MSCI’s ESG ratings, HeidelbergCement has consistently been ranked AA and a leader across 27 peers in its industry. Additionally, the Carbon Disclosure Project has recognised HeidelbergCement with an A rating in the area of climate protection; one of only 179 companies worldwide to achieve this top grade.

Primary steelmaking is another source of heavy pollution, but it will continue to be needed to meet likely global demand. In fact, steel intensity in the energy sector is actually increasing in the short term, with the transition to low-carbon sources of energy generation. The availability of scrap is limited due to its finite nature, so decarbonisation efforts must focus on primary steelmaking. 

ArcelorMittal, which has been selected for the portfolio by Rajiv Jain of GQG, is committed to achieving net-zero carbon emissions by 2050, and has a broad and flexible transition strategy in place.

The Company has identified three distinct pathways that have the potential to deliver a significant reduction in carbon emissions. These are:

  • Clean-power steelmaking, using hydrogen and electrolysis.
  • Circular-carbon steelmaking, which uses circular-carbon energy sources, such as waste biomass, to displace fossil fuels. 
  • Fossil fuel carbon capture and storage, where the current method of steel production is maintained but the carbon is then captured and stored or re-used, rather than emitted into the atmosphere.

Jain says, “ArcelorMittal is making new steel products that help their customers’ transition to a low-carbon future, such as materials for wind turbine construction. As the second largest steelmaker in the world, we believe it is well positioned to develop the required technology and capture the potential competitive advantage.

“While ArcelorMittal does represent one of our highest contributors to carbon emissions, the company’s climate-change related disclosures in our view are improving year over year, which is one of the metrics we track to gauge climate risk.”


HeidelbergCement and ArcelorMittal are the exception rather than the rule. We don’t just invest in high-carbon emitters. Indeed, we tend to invest in fewer than most, which is why the portfolio’s carbon footprint, as measured by the weighted average carbon intensity (WACI), is lower than the benchmark by 32.8%, as at the end of June. Nevertheless, the inclusion of companies such as HeidelbergCement and ArcelorMittal in the portfolio, demonstrates that we don’t adopt a black-and-white approach to green issues. “Despite their high current levels of greenhouse gas emissions, we can’t eradicate carbon-intensive industries, such as steel and cement, overnight,” said Baker. “They are part of the foundations of the global economy, and we believe a lot can be achieved through constructive dialogue to help them move to more climate-resilient business models.

“The transition of these companies will be critical to achieving the goals of the Paris accord, and those that are aligned with or ahead of the required pathways for their respective sectors, will be best placed to manage transition risks and/or take advantage of opportunities.”

*Source:, June 2018.
**Assets under advice as of 31 March 2021. Source: EOS Federated Hermes. Past performance is not a reliable indicator of future returns.

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