July 2022
Themes taking centre stage
Investing through a thematic lens is vital if we are to realise a sustainable world
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Variations on a theme
Passing the halfway point of the year always feels like a pertinent time to reflect on the events of the first six months. Like previous years, it has been an extremely busy time for ESG investors but this year, it’s for quite different reasons. Critics have called ESG a ‘dangerous placebo’ or even a ‘scam’. ESG-oriented funds, despite outperforming during the Covid-19 market turmoil, have not held up well year to date amid rising energy prices and the devastating invasion of Ukraine by Russia. This has certainly created some lively debates, something that will continue for the rest of the year. But as we discussed at our recent Global ESG Summit, those serious about ESG understand it is not the latest fad or bandwagon to jump on – it is a way to mitigate risk and futureproof businesses and portfolios. There will be, like all areas of the market, ebbs and flows in terms of popularity and performance. One thing is clear: we need to continue forging ahead with climate change mitigation and a just transition simply to ensure we all continue to have a planet and society to live and work in for years to come. This issue, we delve into thematics and impact investing. The former is explored in our cover feature looking at different themes we can see in our everyday lives and how they can be reflected, and used to mitigate climate change, in portfolios, as well as in our Q&A with Impax Asset Management’s CEO Ian Simm. The latter is analysed in our interview with Big Society Capital CEO Stephen Muers. We also celebrate the winners of our inaugural ESG Clarity Awards in this issue, because those that can keep up with this fast-paced, evolving industry, needed to be recognised. Enjoy.
Spotlight
COVER feature
Investing through a thematic lens is vital if we are to realise a sustainable world. ESG Clarity asks experts in the areas of Food, Water, Clean Energy, Social Housing and Healthcare where they spy challenges and opportunities
The social investment sector has been criticised for losing its focus, but Big Society Capital CEO Stephen Muers is determined to create ‘long-term and systemic change’
BSC looks inwards and out
Also in this issue ...
The industry’s finest were recognised at the inaugural ESG Clarity Awards 2022 ceremony
Celebrating ESG investment industry talent
How allocating to a variety of sustainable natural capital management practices can protect investors against risk factors
Diversifying natural capital
A drastic reduction of methane emissions is a critical lever in stemming global warming
‘We must act now on methane’
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Sustainable funds are the focus of attention for many investors today – and with good reason, says Royal London AM’s Mike Fox
Sustainable choices
Baillie Gifford’s Kate Fox and Lee Qian explain how responsibly deployed capital can be a powerful mechanism for change
Positive change
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Natalie Kenway Global head of ESG insight, ESG Clarity
Natasha Turner speaks to Impax Asset Management’s CEO Ian Simm about the importance of presenting a well-rounded analysis of market conditions
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Q&A
Companies and asset managers must rethink how they assess physical risk
BSC looks inward and out
Q&A Shelagh Whitley of the PRI on the impact of climate change and biodiversity loss on business Read >>
Analysis ESG Clarity finds out how professional investors across the globe are taking nature into account Read >>
Comment The investment industry must incorporate the urgency of activists in its actions if it’s to realise net zero Read >>
Sponsored content BNP Paribas Asset Management on solar and the new narrative Read >>
Sponsored content J.P. Morgan Asset Management’s Jennifer Wu on climate change investment risks Read >>
Thematic investing is a great way to connect with sustainability issues, because it directly addresses what we see and face every day, a delegate at last month’s Global ESG Summit commented following a panel discussion on the topic. The panellists appeared to agree, discussing the benefits of using thematics and the UN Sustainable Development Goals as a way into conversations about sustainability with clients, and meeting their values and needs. However, liquidity issues, a narrow universe and recent turmoil has plagued this type of sustainable investing, with thematic equities, which includes areas such as water, clean energy, agriculture, ecology and healthcare, all underperforming this year. Despite this, over the long term, we know how important these themes will be for a sustainable future. For example, “where and how we consume food is one of the biggest human cost threats to biodiversity and our ecosystems,” Margaret Kuhlow, global finance practice leader at WWF International, said in her keynote speech at the Global ESG Summit. Here, ESG Clarity takes a look at five of these key themes – food, water, clean energy, social housing and healthcare – and speaks to investment experts in each area about the challenges and opportunities they are seeing.
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‘Over the long term, we know how important these themes will be for a sustainable future’
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Water
Food
Social housing
Clean energy
Healthcare
Access to clean drinking water and safe sanitation infrastructure is critical to public health and underpins why water is the world’s most precious resource, according to Yohann Terry, portfolio manager at Man GLG. Around 9% of the world does not have access to clean drinking water, and an accelerating population growth combined with urbanisation and the effects of climate change are causing significant and damaging supply and demand problems. Terry, who manages the Man GLG RI Sustainable Water and Circular Economy Fund, which launched in March, says investing in circular economy practices “will play an important role” in driving the sustainable changes in manufacturing required to meet these challenges. He says Entegris is an example of a standout company providing advanced fluid treatment solutions to semiconductor manufacturers, which rely heavily on clean water to operate. “This optimises production processes and reduces waste within a critical, growing industry,” he adds. Hadrien Gaudin-Hamama, ESG analyst at Mirova, agrees investing in circular economy solutions is key for addressing water issues. “Investing in combined nature-based solutions and digital tools serving circular water use could reduce pollutions and improve water efficiency on a path towards resilient cities,” he says. Terry adds: “The sector has faced a valuation reset since last autumn, but the long-term need for high-quality companies that deliver innovative solutions has never been greater, and this provides investors with an attractive opportunity to not only generate returns, but make a positive impact.”
Water: protecting the world’s most precious resource
Since Russia invaded Ukraine in February there has been increased demand for more efficient agriculture, according to Kim Tilley, portfolio manager/analyst on the Lazard multi-asset investment team. The two countries make up the breadbasket of the world and now face long delays before much of their farmland could again be productive. Another contributor to the food crisis is global fertiliser shortages. The Lazard Sustainable Agriculture strategy invests in farm innovation and a lot of that is precision agriculture, Tilley explains. One example in the strategy is John Deere, which has a technology called See & Spray Select. “It can be installed on a sprayer and has a set of high-tech cameras that are synced to processors – they identify only weeds via colour recognition,” says Tilley. “These cameras can scan more than 2,000 square feet a second and the identification to spray happens within a 200 millisecond window. Farmers can save nearly 80% on their herbicide costs, which is a huge amount.” Another area of innovation is companies reducing the greenhouse gas emissions from agriculture. The sector, along with forestry and other land use, is responsible for nearly a quarter of greenhouse gas emissions annually. Tilley uses the example of Bovaer technology, which is added to cows’ feed and reduces their greenhouse gas emissions by 30%. John Levy, director of impact at Franklin Real Asset Advisers, adds there is also an exciting opportunity in vertical farming, which he says “will mature into a defined real asset sector that will be a part of well-diversified portfolios”. He predicts over the next few years we will see “alternative use cases for underutilised land and vacant buildings and create opportunities to drive lasting social and environmental impact”.
There has never been a better time to highlight the need for more quality, affordable homes, with the rise in the cost of living and the pandemic leading to increased working from home. With soaring energy prices, the role of real estate in the decarbonisation of the economy is also under the spotlight. “There is a need to innovate within the social housing sector, to not only provide more good quality housing, but also to support the UK’s energy transition,” explains Steve Bolton, head of corporate debt, Europe at LGIM Real Assets. However, he adds, we must ensure social and affordable housing are receiving the investment needed to “at least facilitate but ideally accelerate” the energy transition. At LGIM Real Assets, the team are looking for more innovative funding structures in their investments including the ‘use of proceeds and decarbonisation-linked financings’, which Bolton says “allows us to see how our funding is being used, specifically into energy efficiency works, for example, or funding the development of new below market-rent homes”. He reiterates the call for more investment as he says: “With the need for investment in both new homes (to alleviate increasing need) and existing homes (to enable the energy transition) only increasing, we expect these types of structures to play a more important role in future partnerships.” Interestingly, Resonance’s communications director Paul Handford says there is a significant growing interest from investors looking at social housing for part of their wider ESG and place-based investment strategies, in particular from local government pension schemes. “This increasing trend is driven by pension funds looking to invest in the geographical area of the UK they operate in, where their members live, work and socialise, making a regional social impact while generating a risk-adjusted return and, still achieving broader national diversification.”
For Hector McNeil, co-CEO of HANetf, a clear benefit to a thematic approach to investing in clean energy is the exposure to renewables it offers investors. While the generation of electricity currently accounts for around 27% of global greenhouse gas emissions, decarbonising the sector is paramount, McNeil says. A challenge for energy distribution systems is the speed at which the energy transition is taking place, Vincent van Haarlem, fund manager of the Triodos Energy Transition Europe Fund, also comments. But for investors in clean energy, this is bringing innovators and opportunities. Van Haarlem explains the pace of change means the energy grid needs to be updated to “facilitate a modified utilisation model with more decentralised, more sustainable supply and additional demand driven by electrification of sectors like transportation and industry”. He notes current supply chain disruptions are resulting in even longer lead times and increasing prices for hardware-based solutions. “Innovators are introducing mitigating solutions for capacity restrictions – offering shorter lead times and requiring less resources than grid operators alone can offer,” says Van Haarlem. Battery storage is a case in point, providing storage capacity and data-driven solutions meaning timing of energy consumption can be aligned with supply leading to “a more efficient, more intelligent use of hardware compared to outright grid capacity expansion”, he says. According to the fund manager, the Triodos Energy Transition Europe Fund has invested in GigaStorage – a frontrunner in battery storage in the Netherlands and a strong contributor to the much-needed dialogue on this area.
One of the big shifts since the Covid-19 pandemic is the value of in vitro diagnostics (IVD), which underlies 70% of clinical decision-making in hospitals. It is becoming more highly appreciated as a part of the healthcare industry, explains Maxine Wille, investment analyst for Equity Impact Solutions, at Regnan. Wille says her team believes IVD, which includes devices such as Covid-19 tests and blood glucose monitors, will be “a critical enabler for a more preventative healthcare system, becoming a hotbed of innovation within diagnostics and enabling more rapid, cost-effective and accurate tests”. She says these, in turn, will increasingly enable early diagnoses that lift survival rates, while also cutting treatment costs. Wille also notes some contract development manufacturing organisations (CMDOs), the “picks and shovels” companies of the healthcare sector, are “under-appreciated innovation powerhouses. CDMOs are starting to produce novel, next-generation therapeutic modalities such as cell and gene therapies”. However, they must overcome some adoption hurdles as the modalities move into the commercial stage, says Wille. Senior investment manager on the Pictet-Health Fund Grégoire Biollaz notes, like Wille, the opportunities in innovations that reduce healthcare costs. He says demographic shifts causing an older global population create the challenge of more age-related disease and means keeping people healthy for longer is key to curbing healthcare spending growth. “Despite scientific innovation and progress in medical research leading to better, more efficient standards of care, healthcare costs are rising rapidly due to inefficiencies and wasted resources in the system. Technology has disruptive potential in this area and companies enabling better care and efficiency are poised to capture attractive markets for themselves,” says Biollaz.
Food: war in Ukraine contributes to global food crisis
Social housing: climate change and soaring energy costs shine spotlight on real estate
Clean energy: thematic approach is vital if we are to decarbonise the sector
Tackling social issues on a scale that can create real, lasting change has been the driving force behind Big Society Capital (BSC) CEO Stephen Muers’ career so far. Having worked in the UK government’s Cabinet Office and Ministry of Justice, Muers joined BSC in 2016 to address failings in areas such as criminal justice, health and housing “in a slightly different way” – turning his hand to the private sector’s role and influence. “Tackling things that are hard, but in a big way that has a long-term, systemic change about it, rather than just sticking a plaster on the problem – that’s what gets me up in the morning,” he tells ESG Clarity. Now at the helm of BSC – he was appointed interim CEO in May 2020 and CEO in May 2021 – Muers has overseen projects such as the launch of the BSC Social Impact Trust, which announced plans in November 2020 to raise £100m for social impact projects. Its impact report released in June shows £87m raised so far, financing 160 organisations and with 100% of investments aligned to the United Nations’ Sustainable Development Goals. However, in light of recent criticism of the firm and its impact, and as ex-government and an Oxford University PPE graduate, Muers has the challenge of approaching solutions from the perspectives of the people and organisations BSC works with. “We start with the needs of the organisations we’re trying to serve,” Muers explains. “There are differences in language, tone and style we have to be sensitive to, and there are differences in timescales sometimes – some organisations need money more immediately [than long-term investors are working to]. We’re trying to be the glue that brings these different needs together.” Watch the video interview with Muers for more on social impact investing.
By Natasha Turner
‘Tackling things that are hard, rather than just sticking a plaster on the problem – that’s what gets me up in the morning’
Stephen Muers, CEO, Big Society Capital
Call for reform Earlier this year, The Adebowale Commission on Social Investment released its report, Reclaiming the Future: Reforming Social Investment for the Next Decade. It said the social investment market had “lost its focus” and concluded “comprehensive structural reform to the social investment market” was needed to make it work effectively, including an injection of £800m into UK social investments. According to the report, BSC “needs to be reformed as its current structure is holding back its potential to support the growth of the social enterprise sector”, reducing the returns it seeks from intermediaries, upping its enterprise-centric finance and reducing market capital, legacy investments in property and secured investment. Since the report came out, BSC has lowered its desired rate of return from 4-6% to around 1% per year. When asked about whether social impact investing can have its intended result when done for profit, Muers says: “The returns are appropriate but not excessive and many of the investors are socially motivated organisations like us or local authority pension funds, who are then going to reinvest returns they get in other projects that are similarly supporting some of these things. “So I think it can be reinforcing. There is a ceiling, but we’re not there yet.” Following the report, BSC has also supported the Growth Impact Fund from UnLtd and Shift, and signed the Social Investment Diversity Forum Manifesto to improve diversity and representation within the firm itself – although Muers says it “would have signed it anyway”, regardless of the commission’s findings. The firm’s mean hourly pay gap between women and men was 17% in 2021, and the gap between mean hourly pay for all black, Asian and ethnically diverse employees compared with white employees was 14%. The manifesto commits signatories to seven pledges, including a commitment to EDI, building sustainable and inclusive cultures and amplifying marginalised voices. “I’m not complacent about this,” adds Muers. “The sector as a whole is still not fully representative of society, particularly at senior levels, so there’s quite a lot more to do. We’re taking some steps, but I wouldn’t say we’ve cracked it by a long shot.” Delivering outcomes Despite, or perhaps as a result of, ongoing scrutiny, the social investment space has taken several recent strides. The first is in social housing, in which an agreed standard for measuring impact, the Sustainability Reporting Standard for Social Housing, has been enthusiastically adopted by 21 asset management firms, including BlackRock, abrdn and Schroders. But it isn’t as easy to translate one form of measurement to another area of social impact, as it is for environmental issues, keeping social investment behind its environmental peers. “It’s an apples and pears problem,” Muers adds. “You couldn’t just lift and shift [social housing standards] and put it in health or education or financial inclusion, so that’s the challenge. But in segments we’ll be able to get common standards in place.” Another area of progress is social outcomes, previously known as social impact bonds. A report released at the end of June and commissioned by BSC found these save nearly £3 for every £1 spent by government, reducing the cost of tackling complex social issues such as homelessness and unemployment. “This is the model in which social organisations deliver services for public sector commissions on an outcomes basis, so if you help someone manage their health condition or get work when they’ve been excluded then the government pays the charity or social enterprise on the basis of the outcomes, and we as the investors provide the upfront capital to make that work,” Muers explains. Examples include the Greater Manchester Homes Partnership, which housed 90% more people at risk of homelessness than originally targeted at half the cost, and the Skill Mill, a social enterprise focused on rehabilitating young ex-offenders. Since launch in 2013, it has worked with almost 200 former offenders and seen a reoffending rate of 9%, compared with 72% for its cohort nationally. Looking ahead, Muers is excited to be investing in a new models for financial inclusion. Companies such as Urban Jungle and Wagestream are providing solutions for those often excluded from sectors such as banking and insurance, and such work, together with that focused on dealing with homelessness, will be scaled. It is this scale that is needed most of all, and which will hopefully help Muers feel he has tackled the “big, complicated social problems” that get him up in the morning.
Click here for Stephen Muers’ biography
Stephen Muers’ biography
Stephen Muers moved to BSC as head of strategy and market development in 2016 before becoming interim CEO in May 2020 and CEO in May 2021. Previously, he worked in the civil service, most recently as director, criminal justice policy at the Ministry of Justice. He has held senior posts in the Cabinet Office and the Department of Energy and Climate Change, as well as being a non-executive director of an NHS trust.
Can you tell us about Impax’s thematic range? We have a thematic range on our Irish platform, which covers the environmental markets strategies. This includes a small- and mid-cap focused thematic product, our Leader strategy, which is more mid-cap oriented, and then a global opportunities [fund], which is our principal sustainability lens strategy. In terms of products for the future, our policy is not to launch lots of new opportunities. There will probably be a new one coming out later in the year where we’re looking at the thematics around dividend payment and high rates of current cash for distribution. This is as an area where clients are showing strong interest. Have conversations around thematics and sustainability with clients changed? If you take a retail investor who’s interested in their money doing something positive for society, then to be able to say there’s a thematic product in, for example, water or sustainable food, is reassuring and chiefly a pretty welcome and attractive proposition. If you go to a more professional investor who’s looking at risk profiles and performance relative to a benchmark, then the thematic range can be unappealing because it’s generally seen as too different, too risky compared with just investing passively and the full basket for benchmark. But the transition to a more sustainable economy can be a signpost for high rates of growth, while the risk relative to the main market is much lower. That’s surprising, even for professional investors interested in sustainability, are you not seeing the surge of interest we keep hearing about? Towards the end of last year, there was a sense in the market that the industrial revolutions around energy, transportation, materials, infrastructure etc, are linked to the transition to a more sustainable economy. There was always the likelihood that central banks would want to reverse quantitative easing and take some of the froth out of markets, which was going to require some adjustment and be more painful than most people thought. In that context, the medium-term outlook for this transition to a more sustainable economy remains incredibly persuasive and positive. The issue is what’s going to happen to investor sentiment. For the reasons I just mentioned, I expect we’ll look back on 2022 as the year of consolidation and possibly a little bit of pullback. Hopefully we’ll return to more normal conditions, albeit with less central bank liquidity, which might mean the markets stabilise and recover. Impax has always tried to present a rounded and thoughtful analysis of market conditions and not blindly declare the world has drunk the sustainability Kool Aid, as that’s obviously naive. What is your advice to firms starting to produce impact reports? We’re now in our ninth year of impact reporting, which has been quite a journey just working with companies to ensure we’ve got robust, detailed and comparable information. There’s a real need for convergence around standards so that clients can compare one impact report with another. The advice would be to try and see what others are doing and where possible to use someone else’s methodology or an established methodology rather than create your own.
‘Impax has always tried to present a rounded analysis of market conditions and not blindly declare the world has drunk the sustainability Kool Aid’
Ian Simm, founder and CEO, Impax Asset Management
Click here for Ian Simm’s biography
Ian Simm’s biography
Ian Simm has been CEO of Impax Asset Management since founding it in 1996. Prior to that he was an engagement manager at McKinsey & Company advising clients on environmental strategy. Outside Impax, Simm is a member of the UK government’s Net Zero Innovation Board, and a board member of the Institutional Investors Group on Climate Change.
Watch the video interview with Simm for his thematic outlooks.
The ESG Clarity team was delighted to celebrate the talent, skills and expertise within the responsible investment space at our first ever ESG Clarity Awards ceremony last month. At the Ham Yard Hotel in London, groups, teams and individuals were recognised for their efforts in championing the benefits of ESG investing and raising awareness around the investment industry’s role and responsibilities in building a sustainable future. Natalie Kenway, global head of ESG insight, ESG Clarity, said at the event: “ESG investment has exploded in recent years. I have been told time and again it is a part of the industry where the regulators are struggling to catch up with client demand and innovative product solutions. “So it is a credit to the investment industry that sustainable funds and initiatives have been so successful and adopted by so many. “This is why we felt it was time to recognise the extraordinary talent we have within the responsible investment arena, who have embraced the challenges of the unknown, and faced head on the very scary scenarios such as global warming and inequality. “They have pushed their teams, businesses and industry counterparts, and lobbied corporates, governments and regulators to join them in creating a sustainable future.” Making the grade All award winners were subject to a rigorous judging process. For the fund awards, ESG Clarity’s data partner MSCI created an initial shortlist of funds based on their ESG research.For funds to be eligible, they had to meet the following criteria: • Funds must have 12 months of performance history as of the end of March 2022. • They must be domiciled in UK, Ireland or Luxembourg, listed in sterling and be available to UK retail investors. • Funds must fall into standard universe coverage for MSCI ESG fund ratings, whereby at least 65% of the fund’s gross weight must come from covered securities. More information on the MSCI fund ESG ratings methodology is available here. After that, the shortlists were sent to an independent judging panel of fund selectors and researchers who selected their winner. These scores were added together to find the winners. For the house and initiative-based awards, ESG Clarity invited investment firms, teams and individuals to enter their own submissions showcasing their in-house credentials, work within the industry and/or their achievements as a sustainably invested business. These submissions were then also sent to an independent panel of industry experts and investment professionals, as well as members of the Bonhill editorial team, to be scored before finding a winner. We would like to take this opportunity to thank our judging panel for the time taken to read and research the shortlisted candidates for this inaugural event. A huge congratulations to all finalists and winners, and we would also like to thank everyone who joined us on the night. See you next year!
By Natalie Kenway
‘Our winners have pushed their teams, businesses and industry counterparts, and lobbied corporates, governments and regulators to join them in creating a sustainable future’
+ List of winners
Gallery
UK & Europe House Winners • Most Innovative Fund Launch (Active) Foresight Sustainable Future Themes Fund • Most Innovative Fund Launch (Passive) Rize Environmental Impact 100 UCITS ETF • Best Thought Leadership/Research Morningstar’s ESG research team
• UK ESG Equity – Active BMO Responsible UK Equity Fund • UK ESG Equity – Passive Amundi MSCI UK IMI SRI PAB • Global ESG Equity – Active Pictet-Quest Global Sustainable Equities • Global ESG Equity – Passive UBS ETF (LU) MSCI World Socially Responsible Ucits ETF • Global ESG Fixed Income – Active Royal London Global Sustainable Credit Fund (click to read more) • Global ESG Fixed Income – Passive UBS ETF (LU) Bloomberg MSCI Global Liquid Corporates Sustainable Ucits ETF • EM ESG Equity – Active Stewart Investors Global Emerging Markets Sustainability Fund • EM ESG Equity – Passive iShares MSCI EM SRI Ucits ETF • Climate Focused Funds LO Funds – Climate Transition (click to read more) • Multi-Asset EdenTree Responsible & Sustainable Managed Income Fund (click to read more) • Thematics Pictet-Water • Best Diversity/Corporate Culture Initiative BNP Paribas Asset Management (click to read more) • Best Social Initiative Alquity • Best NGO Supporting ESG Investment Services UKSIF • Engagement Award AllianceBernstein • Best Thought Leadership/Research Morningstar’s ESG research team • Most Innovative Fund Launch – Active Foresight Sustainable Future Themes Fund (click to read more) • Most Innovative Fund Launch – Passive Rize Environmental Impact 100 UCITS ETF • Best ESG Platform Quilter • Best ESG Adviser Thomas & Thomas Ethical Investments • Best ESG Wealth Manager EQ Investors • Best ESG Fund House BMO Global Asset Management • ESG Rising Star Anna Mercer, Square Mile • Outstanding Contribution to ESG Investment My-Linh Ngo, BlueBay Asset Management • Editor’s Choice Award Matt Crossman, Rathbones Play video below to watch footage from the prestigious event.
List of winners
Lombard Odier’s Paul Uddall and Peter Burke pick up an award for Best Climate Focused Fund
Award sponsors
Global credit – the next step Royal London Asset Management
A new urgency: clean energy and adaptation Lombard Odier Investment Managers
Most Innovative Fund – Active Foresight Capital Management
Best Multi-Asset ESG Fund EdenTree
Best Diversity/Corporate Culture Initiative BNP Paribas Asset Management
Foresight’s Nick Scullion collects the Most Innovative Fund – Active award
Alquity’s Suresh Mistry and Paul Robinson were chuffed to win Best Social Initiative
AllianceBernstein’s head of fixed income responsible investing Erin Bigley collected the firm’s Engagement Award
Darren Lloyd Thomas of Thomas & Thomas Ethical Investment was pleased to collect the Best ESG Adviser award
EQ Investors was awarded Best ESG Wealth Manager. Here, joint-CEO Sophie Kennedy shows off the accolade
BMO Global Asset Management picked up two awards – here are responsible investing heads Claudia Wearmouth and Alice Evans. The firm was also awarded winner of the Best ESG UK Equity – Active category for its BMO UK Responsible Equity Fund
ESG Clarity was pleased to recognise Square Mile’s Anna Mercer as the ESG Rising Star of the Year 2022
This year’s Editor’s Choice Award went to Matt Crossman, head of stewardship at Rathbones
BNP Paribas Asset Management’s Sarah Annan and Malika Takhtayeva receive the firm’s award for Best Diversity/ Corporate Culture Initiative
The event gave fund managers, fund selectors and ESG investment professionals the chance to connect in person
‘An excellently organised and executed event. Look forward to working with you more in the future.’ Delegate feedback
UKSIF was awarded Best NGO Supporting Investment Services
The team behind the EdenTree Responsible & Sustainable Managed Income Fund collect Best Multi-Asset ESG Fund
The evening was rounded off with some bowling. Here, Morninstar’s Hortense Bioy gets involved
Winner of the Outstanding Contribution to ESG Investment, BlueBay’s My-Linh Ngo, celebrates
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Best Diversity/ Corporate Culture Initiative
Sarah Annan and Malika Takhtayeva accept the award on behalf of BNP Paribas Asset Management
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Best Multi-Asset ESG Fund
The team behind the EdenTree Responsible & Sustainable Managed Income Fund collect the award
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Most Innovative Fund – Active
Nick Scullion collects the award on behalf of the Foresight team
sponsored content | Lombard Odier investment Managers
A new urgency: clean energy and adaptation
Lombard Odier Investment Managers on the long-term investment case for energy transition and climate change adaptation
Higher commodities prices and the Intergovernmental Panel on Climate Change (IPCC’s) Sixth Assessment Report have, respectively, reinforced the long-term case for the energy transition and climate change adaptation. The tragic conflict in Ukraine has ignited a humanitarian crisis and highlighted the need for reduced dependence on Russian fossil fuel imports, particularly in the European Union. The war has exacerbated supply constraints caused by the Covid pandemic and pushed up energy prices (as well as prices for wheat and other agricultural products). Our recent analysis of fossil fuel prices − including coal, natural gas and oil − revealed that Europe’s energy bill was reaching levels not seen in almost 50 years. The renewables transition Europe is especially vulnerable to an energy shock caused by Russia’s invasion of Ukraine, which has both heightened awareness of the need for energy security and intensified the region’s focus on the renewables transition. The EU now imports 90% of its gas consumption (and 97% of its oil). Of those gas imports, Russia provided about 45% in 2021. Russia also accounts for about a quarter of the EU’s oil imports. On 8 March, the European Commission outlined REPowerEU, which augments the EU’s existing sustainability initiatives with a goal to make the region independent from Russian fossil fuels ‘well before 2030’. Any pivot away from Russian energy supplies will only strengthen the need to deploy wind and solar as the bedrock of future energy supply. In the move toward energy independence, an energy grid powered by renewables will need be accompanied by the scaling up of hydrogen, low-carbon heating, insulation and grid-flexibility solutions. Adapting to climate change However, the IPCC has sounded the alarm that the clean energy transition and other moves to mitigate environmental damage must also occur alongside adaptation measures. In the Sixth Assessment Report on the science related to climate change, the panel noted that the world is not prepared for climate change and that the need for action is even more urgent than previously assumed. The world is under-prepared for the risks to life on land and in the oceans from rising temperatures. These range from more frequent heatwaves, droughts and floods to coastal erosion from rising sea levels. Climate change has already reduced productivity in agriculture and fisheries, for instance, threatening food security. We must recognise that at least some of these effects are inevitable, and our response must go beyond minor modifications to usual practices. Climate change will require more extensive, transformative changes in our behaviour and infrastructure. The risks are particularly acute beyond 1.5C of warming, so there must also be simultaneous reductions in greenhouse gas emissions. If temperatures exceed 2C of warming, strategies to adapt will become impossible in some regions of the world. The IPCC has also warned about uneven progress in adaptation measures, which is partly due to lack of political commitment and funding. In parts of Europe, for example, existing and planned projects are not enough to avoid possible losses of habitat and ecosystem services, heat-related deaths, crop failures, water rationing and loss of land. The world will benefit most from adaptation the sooner measures are put in place. The longer they are put off, the more difficult and expensive they could be. Measures may also need to be revised constantly, as some may have unintended harmful consequences (so-called maladaptation). The construction of sea walls and other defences to protect coastal areas, for example, can destroy coastal ecosystems such as coral reefs. The investment opportunity There is wide scope for adaptation in land use, industry, urban infrastructure and flood warning systems, among other areas. Successful adaptation can help humanity and the natural world cope with a 1.5C world. Ultimately, the scale, scope and urgency of the situation creates opportunities to invest in companies that may benefit from the global energy transition and the scale of investment needed for adaptation. Our Climate Transition Fund is well-placed to capture them.
‘The scale, scope and urgency of the situation creates opportunities to invest in companies that may benefit from the global energy transition and the scale of investment needed for adaptation’
Name Name, job title, Company name
FOR PROFESSIONAL INVESTOR USE ONLY This marketing communication is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393. This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. Investments are subject to a variety of risks. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. Past performances is no guarantee of current or future returns, and the investor may receive back less than he/she invested. No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. ©2022 Lombard Odier IM. All rights reserved.
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sponsored content | royal london asset management
Global credit – the next step for sustainable investing
Rachid Semaoune, senior fund manager, Royal London Asset Management
For professional clients only, not suitable for retail clients. In launching the Royal London Global Sustainable Credit Fund in February 2021, we were building on our hard-won expertise in both fixed income and sustainable investing. We’ve been managing sustainable funds for many years, long before sustainable investing became mainstream. Our Sustainable Leaders Fund dates back to 1990, changing from being ethical to sustainable in 2003, and we launched our mixed-asset (equities and credit) sustainable funds in 2009. While our fixed income heritage is in sterling credit, we’ve been developing our global credit expertise since 2012 and it was time to bring this together with our leadership in sustainable investing. We built on our experience of running such a strategy on a segregated basis. That portfolio had performed strongly since inception on both an absolute and a relative basis, and we wanted to extend this opportunity to more of our clients. We have shown over an extended period that embedding environmental, social and governance (ESG) values into investing does not need to come at the expense of financial returns. A well-established investment process We have two major requirements of the companies in which our sustainable funds invest. First, they must provide products or services that benefit society. Second, they must be sector leading from an ESG perspective. By integrating these criteria with fundamental financial analysis, we seek to ‘future proof’ our portfolios against, among many factors, climate change, technological innovation, regulatory changes and default risks. Historically, sustainable investing has been closely associated with equity investing, yet we believe it suits credit just as well. The risk profile of bonds is asymmetric: the upside is capped, whereas the downside is everything, so effective risk management is critical. This is where the sustainable approach is especially valuable, since it limits the investment universe to companies with relatively low ESG risks. The first part of our process involves sustainability screening by our in-house team of ‘responsible investment’ analysts, who each have areas of expertise. This creates a highly diversified investment universe of around 650 issuers from which to select. A global fund counteracts one of the main drawbacks of sustainable investing – that it inevitably shrinks the investment universe. While some sectors and issuers are well represented globally, such as banks and insurance, others are essentially specific to certain markets (for example, social housing in the UK and technology in the US). Going global allows us to diversify across more sectors and more issuers, thereby reducing the idiosyncratic risks that we would otherwise face. It also brings additional opportunities, like taking advantage of cross-currency inefficiencies to pick up yield. Lastly, we apply our credit philosophy. A core premise is that credit markets are inefficient: by conducting our own research, centred on exploiting these systematic inefficiencies, we believe we can achieve higher and more consistent returns. As an example, we don’t just buy ‘labelled bonds’ eg green, sustainable or infrastructure bonds. They might seem like obvious candidates for sustainable investment: however, the reality is much more complicated. Labelling often means that these bonds trade at a premium as managers will pay up for sustainable credentials: this reduces the returns that our clients would receive, but without necessarily gaining anything. Apart from the uncomfortable fact that many of these bonds are self-certified by the issuer, the financials can be less than transparent and a few green projects doesn’t mean that a company meets our overall ESG standards. Challenging markets The pandemic initially supercharged sustainable returns as sectors that lie at the heart of sustainable investing, such as healthcare and technology, performed strongly and ‘old economy’ sectors languished. However, 2022 has been far more challenging as energy and commodity prices have soared following the Russian invasion of Ukraine and retaliatory sanctions. With energy, mining and commodities companies accounting for over 12% of global credit markets, the headwinds to performance have been strong. With higher inflation and interest rate hikes, bond markets have struggled, which has also impacted the allocation to high yield bonds that enhances the fund’s yield. We’re not discouraged by this short-term cyclical underperformance, however. We believe firmly in sustainable investing as a way to make a difference and deliver good investment returns over the longer term, and global credit is an ideal asset class for our approach to sustainable investing. Investment Risk: The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Credit Risk: Should the issuer of a fixed income security become unable to make income or capital payments, or their rating is downgraded, the value of that investment will fall. Fixed income securities that have a lower credit rating can pay a higher level of income and have an increased risk of default. Efficient Portfolio Management (EPM) Techniques: The Fund may engage in EPM techniques including holdings of derivative instruments. Whilst intended to reduce risk, the use of these instruments may expose the Fund to increased price volatility. Exchange Rate Risk: Changes in currency exchange rates may affect the value of your investment. Interest Rate Risk: Fixed interest securities are particularly affected by trends in interest rates and inflation. If interest rates go up, the value of capital may fall, and vice versa. Inflation will also decrease the real value of capital. Liquidity Risk: In difficult market conditions the value of certain fund investments may be difficult to value and harder to sell, or sell at a fair price, resulting in unpredictable falls in the value of your holding. Emerging Markets Risk: Investing in Emerging Markets may provide the potential for greater rewards but carries greater risk due to the possibility of high volatility, low liquidity, currency fluctuations, the adverse effect of social, political and economic instability, weak supervisory structures and accounting standards. Responsible Investment Style Risk: The Fund can only invest in holdings that demonstrate compliance with certain sustainable indicators or ESG characteristics. This reduces the number securities in which the Fund can invest and there may as a result be occasions where it forgoes more strongly performing investment opportunities, potentially underperforming non-sustainable funds. For further information on RLAM products and services, please contact us. Find out more • For further information, please visit rlam.co.uk/gscf • Find out more about our range of sustainable funds at rlam.co.uk/sustainable • Browse our latest thought leadership articles here For Professional Clients only, not suitable for Retail Clients. This is a financial promotion and is not investment advice. The views expressed are those of RLAM at the date of publication unless otherwise indicated, which are subject to change, and are not investment advice. For more information on the fund or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk. Issued in June 2022 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
‘Global credit is an ideal asset class for our approach to sustainable investing’
Allocating to a variety of sustainable natural capital management practices, says Nuveen’s Martin Davies, has the potential to protect investors against physical and market risk factors
A globally diversified portfolio is the best way to invest in natural capital assets, but lack of data is still a barrier. The global decline of nature is intrinsically linked to receding economic value and humanitarian risk, and it is therefore in the best interest of investors and corporates to support mature, as well as new and emerging, solutions built to protect and sustainably manage and restore ecosystems for the sake of their people and long-term returns. A blend of natural capital assets offers a degree of inflation sensitivity, diversification and enhanced risk-adjusted returns, with lower historical volatility than traditional asset classes such as equities and bonds. By allocating to a variety of sustainable natural capital management practices, such as installing solar panels on farms to replace fossil fuels with renewable electricity used in irrigation pumping, and regenerative agriculture solutions, for instance, investors have the potential to diversify against physical and market risk factors including weather, crop price volatility and government intervention and regulation. Careful consideration Farmland and timberland assets could be powerful diversifiers because of their low or negative correlation with traditional stocks and bonds, making these land-base real assets a suitable volatility buffer in today’s environment and a good source of uncorrelated return. However, due to the dearth of agricultural performance data and benchmarks that are available globally, it has been difficult to apply portfolio optimisation when integrating farmland and/or timberland assets into a portfolio. For that reason, both top-down theoretical elements and bottom-up real-time returns and constraints should be worked into the portfolio optimisation model to create a high-fidelity approach that accurately models risk and returns in natural capital assets. Natural capital assets can act as an inflation hedge, buoying their attractiveness in the current environment. However, high-yield payoffs are not a given, so opportunities must be carefully analysed. Natural capital underpins livelihoods and the wellbeing of people all over the world, and the Earth’s assets. Air, land, water and biodiversity are quickly becoming a new frontier for sustainable finance. Investors are quickly mobilising with the understanding that sustainable economic growth is intrinsically linked to the management and regeneration of natural resources, but to some degree these asset classes are still considered nascent. Corporates, policymakers and incumbent investors must therefore work together to communicate the societal – and investor – returns that could be yielded from greater institutional capital allocation to the real assets supporting and sustaining life.
Martin Davies Head, Nuveen Natural Capital
‘Natural capital underpins livelihoods and the wellbeing of people all over the world, and the Earth’s assets’
Diana Glassman, director – engagement, EOS, Federated Hermes
A drastic reduction of methane emissions is a critical lever in stemming global warming and triggering significant social benefits, writes Federated Hermes’ Diana Glassman
Methane’s unique role as a greenhouse gas and as the primary component of natural gas means that reducing methane emissions can yield significant economic, environmental and social benefits. Reducing these emissions this decade is probably the single most important action the world can take to cut the rate of global heating. Methane warms the planet about 80 times more effectively than CO2 over 20 years, but after about a decade starts to dissipate. Making swift reductions in methane would curb rising temperatures more quickly than carbon dioxide cuts in the short term. It would also buy valuable time for big carbon-emitting sectors to find viable alternatives, helping to keep 1.5C of heating within reach. The importance of methane as an effective short-term lever against rising planet temperatures was recognised at COP26 when the US and EU announced a partnership to cut methane emissions by 30% by 2030, from 2020 levels. More than 100 countries signed up to the Global Methane Pledge, acknowledging the urgency of the issue. The latest global heating forecast from the World Meteorological Organization and the UK Met Office underscored that time was running out, with a 48% chance we will exceed 1.5C within the next five years because of record greenhouse gas levels. There is also a critical social benefit to reducing methane emissions. Methane has deleterious health impacts, contributing to premature deaths, asthma-related hospital visits due to the formation of ozone at ground-level, and lost labour due to extreme heat. Therefore, curbing methane emissions to mitigate climate change, which disproportionately impacts those least able to adjust to it, would help to avoid exacerbating existing inequities. Engagement approach Investors have a key role to help support companies on this journey and produce tangible methane reduction results. It is important to ask investors and their representatives to push investee companies to urgently reduce their methane emissions. The need to act this decade means senior company executives can be more easily held to account, for example, by pushing for the inclusion of methane-reduction targets in executives’ short-term compensation structures. For example, the Federated Hermes EOS team seeks a 60-75% reduction in oil and gas operational methane emissions by 2030, from a 2015 baseline. Specifically, we ask for methane reduction commitments and implementation plans aligned with the UNEP-managed Oil and Gas Methane Partnership (OGMP) 2.0, and an advocacy plan in favour of the Paris Agreement goals. The OGMP offers oil and gas companies a comprehensive framework to improve the transparency and credibility of measuring and reporting methane emissions from oil and gas operations. Alignment with the OGMP must be a priority for oil and gas producers. It is in their own financial interest with increasing customer preference for lower-methane-emission suppliers and investor scrutiny of methane-emission practices. This latter factor may make it harder for poor methane performers to access financing, especially from investors that have their own net-zero financed emissions goals. Methane emissions have not received the attention they need and we welcome the shift in global focus towards this issue following COP26. Their reduction is material to financial performance and long-term stability of investment portfolios across asset classes, and it is one critical lever we have to enable the reduction of the rate of temperature rise and to stay within striking distance of 1.5C. It is imperative investors continue to engage with companies and policymakers to encourage the transition to renewable energy and an overall reduction in demand for fossil fuels. In parallel, they must push fossil fuel companies and trade associations as well as their bankers and customers to develop collaborative solutions that reduce actual methane emissions and have a real near-term impact on climate outcomes.
‘Curbing methane emissions to mitigate climate change would help to avoid exacerbating existing inequities’
Diana Glassman Director – engagement, EOS, Federated Hermes
Sonya Likhtman, lead engager, Federated Hermes Biodiversity Fund, EOS at Federated Hermes
Sustainable funds are the focus of attention for many investors today – and with good reason, according to Mike Fox, head of sustainable investments at Royal London Asset Management
For professional clients only, not suitable for retail clients. One unexpected effect of the Covid pandemic was the acceleration of several trends such as online shopping and flexible working, which in turn has hastened the decline of some areas of the economy while turbo-charging others. Meanwhile, the invasion of Ukraine has drawn attention to food and energy security and the need to change how we think about these. We believe this background and the strong long-term returns, both financial and societal, that sustainable strategies can point to, means that sustainable funds are worthy of consideration by all investors. It is something which has been moving in this direction for many years – we launched our Sustainable range over 30 years ago, and our investment philosophy has evolved and developed ever since. However, it has always been based on the fact that we think markets often undervalue companies that can have a positive influence on society and the environment. Our sustainable funds aim to exploit this inefficiency, ensuring that every company we buy meets both a sustainable and financial hurdle. But our range is more than an investment philosophy. Filling in the gaps We also look to work with advisers – both to talk through why a sustainable approach does not mean compromising on return potential but also to make sure that it can meet the varied needs of their clients. Client demand meant that we launched global equivalents of our UK equity and credit strategies during the past two years. As we neared the end of 2021, we worked with a number of clients and risk-rating agencies to fill a gap in this range. Risk ratings such as Defaqto and Dynamic Planner are integral tools in the adviser toolkit. As a company that is fully committed to the adviser market, we are keen to ensure this range covers a range of risk appetites. As a result, in May 2022 we launched the RL Sustainable Growth Fund. While this is a new fund, it is based entirely on existing proven capabilities. The fund uses the same underlying global equity and credit exposure as our existing RL Sustainable World Fund, but with a lower equity exposure to meet the needs of investors with a lower risk appetite. With the fund rated as a 6 by both ratings agencies, it complements our existing multi-asset sustainable funds – so that advisers have a comprehensive suite of funds for an investor to find the risk profile that suits them, but still access the same underlying investment philosophy and team. Core principles This brings us back to sustainable investing at the core of fund management – identifying financially and socially attractive companies, valuing them and timing our investment to maximise the returns to clients. Sustainability is booming and the pandemic and its aftermath have accelerated its agenda across governments, businesses and consumers. This will help us find successful investments in the future. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. The RL Sustainable Growth Fund can only invest in holdings that demonstrate compliance with certain sustainable indicators or environmental, social and governance (ESG) characteristics. This reduces the number securities in which the Fund can invest and there may as a result be occasions where it forgoes more strongly performing investment opportunities, potentially underperforming non-sustainable funds. For further information on RLAM products and services, please contact us. Find out more • For further information, please visit rlam.co.uk/intermediaries • Find out more about our range of sustainable funds at rlam.co.uk/sustainable • Browse our latest thought leadership articles here • View contact information
‘Sustainable funds are worthy of consideration by all investors’
For Professional Clients only, not suitable for Retail Clients. This is a financial promotion and is not investment advice. The views expressed are those of RLAM at the date of publication unless otherwise indicated, which are subject to change, and are not investment advice. For more information on the funds or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk. Issued in June 2022 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
Mike Fox, head of sustainable investments, Royal London Asset Management
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