October 2023
Biodiversity top trumps
ESG Clarity examines six biodiversity funds to dig into current trends and understand how investors should be building nature-positive portfolios for playing the long game
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Amplifying marginalised voices
It’s becoming ever-more evident the investment industry must listen to, and be led by, a broader range of people than it has traditionally. The Africa Climate Summit closed last month with criticism reported in The Guardian that the proposed solutions – carbon markets, carbon credits and technology – to phasing out fossil fuels are being led by interests of the global north “and are being marketed as African priorities when in reality they will embolden wealthy nations and large corporations to continue polluting Africa”. In this issue, Tribe Impact Capital’s Amy Clarke makes clear investors need to be listening to climate scientists and economists’ warnings about tipping points if they want to stress-test their portfolios effectively. And CCLA’s Martin Buttle stresses the importance of elevating the employment rights and working conditions of workers themselves. It is in this environment the Taskforce for Nature-related Financial Disclosures’ final recommendations have been launched (of which technical experts group member Vian Sharif provides a comprehensive overview here), and its requirement to disclose engagement with Indigenous communities and local people has been welcomed. Will the TNFD lead to more robust and impactful biodiversity funds? We examine some of those already on the market. Finally, in the ethos of our Campaign for Better Governance, we always encourage the industry to look inwards, and Michael Nelson has delved into the current makeup of ESG teams at fund management firms, finding that listening to those with a range of expertise, is often the best way forward. I am also up for listening to your thoughts on this issue! Email natasha.turner@markallengroup.com
Spotlight
COVER story
ESG Clarity takes a look at six biodiversity funds to dig into current trends and examine how investors should be building nature-positive portfolios for playing the long game
Vian Sharif says the new disclosure recommendations will empower investors to manage risks associated with nature and biodiversity
TNFD in action
As hiring slows, Michael Nelson explores the need for ESG professionals at fund firms to have investment expertise
ESG upskilling
Also in this issue ...
Nuveen’s Ben Kerl builds the case for investing in real estate companies that are reducing their emissions in line with the Paris Agreement
Concrete benefits
Varied exposure among managers to semiconductor companies is leading to very different outcomes, writes Morningstar’s Ronald van Genderen
Spotlight on semiconductors
Mathieu Nègre of the UBAM Positive Impact Emerging Equity fund on SDG alignment in emerging markets
Directing investment to where it’s needed most
Lottie Sweeney explains the rationale behind adding climate and governance criteria to ESG Clarity’s Responsible Ratings index
Getting ahead of change
Amy Clarke argues for a new approach to testing portfolios and warns that current models are underplaying climate change risks
Beyond stress testing
Martin Buttle speaks to Natalie Kenway about how investors can take action on modern slavery and labour rights abuses within portfolios
‘An agent for change’
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EDITORIAL
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analysis
fund manager comment
sector review
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ESG Clarity Intelligence
fund selector comment
RRI
Christophe Boucher explains why ABN Amro is joining the Net Zero Asset Managers initiative
‘Real-life consequences are clear’
interview
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Natasha Turner Global editor, ESG Clarity
Fund selector comment Engagement on ESG is key for fund selectors in gaining an understanding of a company Read >> Comment Fossil fuel interests are an essential part of the debate in the run-up to COP28 in Dubai Read >> Q&A Stephanie Kelly tells Laura Miller what ESG projects are in the pipeline for Redwheel’s investment teams Read >> ESG Clarity Intelligence The meaning of ‘ESG’ can’t be questioned if we are to address global challenges Read >> Sponsored content Polar Capital’s Thiemo Lang discusses Europe’s answer to the US Inflation Reduction Act Read >> Comment The crucial role shareholders can play to move companies forward on climate goals Read >> RRI ESG Clarity rebalanced its Responsible Ratings Index due to a change in MSCI methodology Read >> Sector review The sustainable global growth equity market has finally turned a corner, says Morningstar Read >>
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What should a biodiversity fund look like? It’s a question that’s going to attract increasing attention with the recent Taskforce for Nature-related Financial Disclosures hopefully opening the door to better data from companies on their impact on nature (or at the very least, nature’s impact on them). The number of mutual and exchange-traded funds focused on biodiversity has grown significantly over the years, with 19 vehicles available in Europe by mid-2023, according to Morningstar Direct, while assets under management in such funds tripled to nearly $1trn in 2022, and rose again to around $1.4trn by June 2023. However, with a lack of consensus around best practice, as well as little regulatory oversight, it can be hard to determine what a good biodiversity fund looks like. “Methodologies and metrics are still nascent and are inconsistently applied, and analysis to date often meshes together assessments of nature-related financial risk with those of impacts, muddying the topic for investors seeking to build nature-positive portfolios,” according to a recent Sustainable Fitch report, Biodiversity in ESG: Investor Focus on Impact Grows.
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Scale of impact Taking the six biodiversity funds, as classified by Morningstar Direct, that were launched in Europe before 2022, we can start to paint a picture of current trends. Before getting into the ‘muddy’ topic of building a nature-positive portfolio, it’s worth asking whether any kind of diversified portfolio could be built. These six (as well as the 13 other biodiversity funds Morningstar identified as launching since 2022) are all equity funds, although there is certainly growing interest in incorporating biodiversity consideration into fixed income. Then there’s the sector and geographic exposure, which is heavily weighted to industrials, and the US and Europe, respectively. A European bias may make sense for a European-domiciled fund, but when it comes to biodiversity, some say the areas most affected by biodiversity loss, such as Latin America and the Caribbean, must be taken into account. “A company like Oatly or Beyond Meat that is selling plant-based products to people almost exclusively in the west is only having an indirect impact on biodiversity alleviation,” says Stuart Forbes, co-founder of Rize ETF. “Or a company like John Deere that is making water usage more efficient with new technology and so on, and selling their products in developed markets. The technologies they are building have global application but in reality they’re not going to be used in developing markets in the foreseeable future because they’re too expensive. “The scale of the impact matters and the geographical location of the company’s products and services is really crucial.”
Mitigation vs positive impact The most contentious issue however, as the Sustainable Fitch report points out, is what really counts as addressing biodiversity? Is it mitigating biodiversity loss? Making a positive impact on nature? Minimising nature-related financial risk? “Companies can either focus on solutions that positively contribute to the challenges of biodiversity loss or they can have strong exposure to biodiversity and are looking at how they can deal with the issues they are facing,” says Daniel Wild, chief sustainability officer at Swiss private bank J. Safra Sarasin, who thinks more companies should focus on “pure plays” within biodiversity for these funds to be populated. For Forbes, it’s the trade-offs between negative and positive impacts on biodiversity loss – for which data is limited – that need to be taken into account. The six biodiversity funds present a range, using a variety of methodologies from proprietary to tools such as Encore and Iceberg Data Labs. Let us know which ones you think are coming up trumps. All Morningstar data as at 18 July 2023.
Swiss Life Funds (Lux) – Equity Environment & Biodiversity Impact
Echiquier Climate & Biodiversity Impact Europe
UBAM – Biodiversity Restoration
Ossiam Food for Biodiversity Ucits ETF
BNP Paribas Funds Ecosystem Restoration
Aviva Investors – Natural Capital Transition Global Equity
Click on cards to turn and read fund facts and methodologies
Size €1.7bn Performance YTD 7.95% Morningstar category EAA Fund Sector Equity Ecology Top sector Industrials Biodiversity loss mitigation or positive impact? Positive impact but aims to have a maximum 5% revenue that negatively impacts SDGs 12, 14 and 15 Methodology ESG exclusions, ESG controversies measured, UNGC principles measured, revenue share in relevant SDGs or business areas as key impact metrics
Size €99m Performance YTD 4.09% Morningstar category EAA Fund Sector Equity Ecology Top sector Basic materials Biodiversity loss mitigation or positive impact? Both, although 69.3% of the portfolio has a high impact on biodiversity. Acknowledges ‘few measures of impact and negative externalities exist to date’ Methodology Proprietary – identifies impact on biodiversity using research (Encore tool, SASB materiality grid, NGO reports, broker research). Calculates a score based on three or four pillars, plus a penalty linked to environ-mental controversies. This takes into account negative externalities of companies, penalising those involved in controversies relating to palm oil, soybean, overfishing, deforestation, factory farming, fish farming and animal welfare
Size €40m Performance YTD -0.18% Morningstar category EAA Fund Global Small/Mid-Cap Equity Top sector Industrials Biodiversity loss mitigation or positive impact? Biodiversity loss mitigation Methodology IMAP to identify companies reducing biodiversity loss but also ‘those taking biodiversity goals seriously’. ESG exclusions. Internally-designed methodology which covers principal adverse impacts, SDG misalignment, controversies and overall ESG and governance quality
Size €35m Performance YTD -2.05% Morningstar category EAA Fund Other Equity Top holdings Chipotle, Whitbread, Starbucks, McDonald’s, Target Biodiversity loss mitigation or positive impact? Invests in companies in food supply chain in developed countries with the lowest impact on local biodiversity loss as assessed by Iceberg Data Lab Methodology Uses Mean Species Abundance to reduce investable universe
Size €14m Performance YTD -29.04% Morningstar category EAA Fund Sector Equity Ecology Top sector Industrials Biodiversity loss mitigation or positive impact? ESG solutions Methodology Just ESG, but identifying companies ‘engaged in improving aquatic, terrestrial and urban ecosystems services’
Size €29m Performance YTD 8.52% Morningstar category EAA Fund Global Large-Cap Blend Equity Top sector Industrials Biodiversity loss mitigation or positive impact? Both. Claims to have 0% of the fund negatively affecting biodiversity Methodology Proprietary – uses NGO datasets to classify more than 150 sub-sectors into having a low, medium or high impact on nature. Then measures company performance on sector metrics. Engages every holding on biodiversity impacts and dependencies
Goldman Sachs
30%
Bank of America
29%
Wells Fargo
31%
Public Storage
35%
Raytheon
38%
Percentage of climate resolutions supported at companies in 2023
Travelers
56%
Chubb
72%
Boeing
91%
Caterpillar
97%
Percentage of climate resolutions supported at companies in 2022
Last month’s launch of the Taskforce on Nature-related Financial Disclosures (TNFD) represents a significant milestone for risk management and opportunity that perhaps couldn’t have been envisaged just three years ago. This ground-breaking initiative, akin to the Task Force on Climate-related Financial Disclosures (TCFD), is likely to transform the way investors assess and manage risks associated with nature and biodiversity in the wake of a raft of materiality and disclosure regulation. The TNFD, comprising a comprehensive framework for disclosures, offers detailed guidance on what, where and how to disclose essential information about an organisation’s dependencies and impacts on nature. But what are its key features, how can investors integrate it into their decision-making as fiduciaries and where is the data? LEAP into action The TNFD’s core objective is to facilitate the integration of nature-related risks and opportunities into financial decision-making. To achieve this, it provides detailed information on the scope of required disclosures. These disclosures encompass an organisation’s actual locations – a key differentiator of nature-related considerations, given the location specificity of biodiversity, alongside dependencies on nature, its impacts on nature and the related material financial risks and opportunities in line with the approach recommended in other frameworks such as the International Sustainability Standards Board. It helps investors understand how the disclosed data fits into the TNFD’s unique approach known as its central LEAP framework, which stands for location, exposure, action and performance. This framework supports investors in understanding an organisation’s risks and opportunities comprehensively. It provides guidance for investors in managing the same in terms of their portfolios of investee companies or loan books. Furthermore, the TNFD offers guidance on how organisations can plan for future attempts at disclosures. This forward-looking approach ensures investors receive a comprehensive view of company strategies to both mitigate nature-related risks and capitalise on opportunities. Identify, measure, act While the TNFD’s requirements may seem complex, the data required for these disclosures already exists. The TNFD, alongside other frameworks, emphasises three key dimensions for investors approaching the measurement of risk and opportunity. First, identify investee companies’ interfaces with nature; second, measure the materiality of impact and dependency; third: act. Understanding how companies, even in high-impact industries, are managing their transition plans, is crucial for active stewardship to work. Finally, the data to enable effective reporting does exist. Though in its early stages, data currently falls into two categories. Descriptive data, describing the current state of investee company activity, triangulates scientific assessments on impacts, dependencies and footprints by industry, geospatial overlays, management practices and increasingly transparent information on company location, operations and supply chains. However, exciting developments in the second category, predictive data, have yielded new forward-looking metrics. As standardised, transparent data combines with the development of nature and biodiversity transition scenarios issued by the TNFD and NGFS, new predictive metrics emerge to enable a forward-looking view of potential biodiversity related financial risks on company valuations into the future – ‘biodiversity value at risk’. The TNFD and other frameworks agree on the importance of identifying, measuring and acting upon nature-related factors. With this new disclosure framework, investors are better equipped to make informed decisions that account for the profound impact of nature and biodiversity on financial outcomes.
‘The TNFD and other frameworks agree on the importance of identifying, measuring and acting upon nature-related factors’
Vian Sharif Head of sustainability, FNZ, founder of NatureAlpha and member of TNFD technical experts group
Click to read TNFD’s recommendations and recommended disclosures
Recognising all skills Whether someone without a background in finance would find it tougher to interact with fund managers on ESG regulation and risk, however, may depend on how receptive the firm is to ESG as a principle for their investment strategies. “I imagine it would be more difficult for someone without a financial background to interact with fund managers at a very large investment company, because it will be harder to find consistency between what a company is saying versus what they are doing,” Kumar says. ESG integration is increasingly commonplace, and many investment teams are also receiving sustainability training. Indeed, a recent ED4S consultation found 64% of 39 financial sector organisations it surveyed provided some kind of sustainability training to employees. Kumar says at his firm the fund managers are “already quite receptive” when ESG concepts and risks are explained to them. “We feel like we are an important part of the investment team, and that upskilling from an investor’s perspective happens because we attend investor meetings and have conversations about the types of things that we are looking at on a given week.” Ultimately, having a balance of backgrounds in the team is key. “Firms looking to take a more organic approach have placed ESG professionals into the business where investment teams can partner with them on a day-to-day basis,” Strelczak says. Kumar adds: “Having a diverse set of skills and knowledge is very useful in helping understand the various sectors we invest in, from pharmaceuticals and tech to consumer goods. Additionally, it gives fund managers the chance to ask questions and try to understand things from our perspective as well.”
‘Tailored ESG training, incorporating investment principles, is likely to grow because it is not possible to be a specialist in all areas of ESG’
Mandy Kirby, co-CEO, City Hive
‘Having a diverse set of skills and knowledge is very useful in helping understand the various sectors we invest in’
Sawan Kumar, head of stewardship, Evenlode Investment
Year-on-year increase in green talent concentration
14.8%
Median green talent concentration in the finance industry
1 in 15
Median green talent concentration across all industries
1 in 8
Source: Global green skills report 2023, LinkedIn
Since 2021, fund managers have embarked on a significant recruitment drive for ESG professionals in a hurry to build out their ESG teams on the back of increased demand from investors. However, things are beginning to change. Recruiters are seeing the scramble for ESG talent beginning to slow, citing a worsening economic landscape and anti-ESG lobbies in the US as reasons for the change in direction. “In recent months, there has been mixed media on ESG, with more claims against greenwashing and ESG fund performance, which may have created a pause for internal recruitment,” said Sophia Deen, associate director for investments, front office and ESG hires at Bruin Financial, back in July. Given this, the focus is turning to equipping current ESG research and other sustainability specialties with more investment expertise, according to Tom Strelczak, director and founder of recruitment firm TWS. According to Strelczak, most ESG professionals at asset management firms are primarily concerned with thematic research and stewardship. However, he has seen an increasing need for these professionals to take on more financially material aspects of firms’ strategies, saying it is often not enough for analysts to simply conduct thematic level research on a company, they must also understand the financial material impact of their ESG research. “Not all those within sustainability from non-financial services backgrounds have the requisite qualifications to tackle this adequately with portfolio managers and analysts within an investment function,” says Strelczak. “As such, we find clients offering to put these employees through financial qualifications so they can better contribute to the investment decision making process, if not within it, then at least advising.” According to Strelczak, training often takes the form of CFA qualifications, and ultimately depends on the appetite of the individual to engage more frequently with the business on these decisions as opposed to staying more firmly within the sustainability research space and operating in a purely ‘thematic’ capacity away from the decision-making process. Mandy Kirby, co-CEO at City Hive, says it is great to see training is becoming more tailored to investment principles. “The market for tailored ESG training, incorporating investment principles, is likely to grow because it is not possible to be a specialist in all the possible areas of ESG – climate alone is a massive topic.” Not the be all and end all After spending 18 months at Schroders, Sawan Kumar joined Evenlode Investment as head of stewardship, and took the CFA ESG course, which he found helped him understand best practice. “It was just after the CFA released it, so we thought it would be useful to take as, if the CFA asked questions about carbon emission intensity, then that is obviously something we would need to start thinking about at a portfolio level,” says Kumar. “Because Evenlode invests primarily in companies for the long term, climate change is a fundamental business risk for us. So, as you can imagine, ESG is one of the risks we look at for every company that is added into our universe, and it is a key factor in our investment process.” However, he never went on to complete the full CFA qualification. “I did not want to spend the next three or four years of my life studying for it if I had no intention of getting involved with fund management, so it never really appealed to me. Besides, we already work very closely with our fund selectors, and we attend all the investor meetings alongside them, so our stewardship team is well versed in our investment processes because of that on-the-job training and experience. “Maybe if that process was not as embedded, in terms of how we manage long-term risk and how ESG fits into that model, then you could argue that it would make sense for us to do some external qualifications.”
‘The flaw is that at 3C of warming, let alone 6C, there is an assumption the world will somehow function as it is. It won’t’
Stress testing investment portfolios for climate scenarios greater than 2C of warming is, in the main, futile. So, why are we doing it? Let’s look first at why it should be considered ineffective. When thinking about the risks of a changing climate, the standard unit of measurement is gross domestic product (GDP). A report in 2021 from the Swiss Re Institute looked at the expected impact on global GDP by 2050 under different temperature scenarios, compared with a world without climate change. It found that, depending on the amount of mitigating activity, GDP would fall between 4-18% with associated temperature increases ranging from less than 2-3.2C. On the other hand, the 2018 Nobel Prize winner, William Nordhaus, claimed that 3C of warming would reduce global GDP by just 2%. And at 6C of warming, he argued it would decline by 8%. Climate scientists often shy away from absolute certainties given the nature of the data they deal with. The complexity of our natural environment is such that we will never truly understand it, even with the most advanced computer modelling and data. That’s why we often hear phrases like ‘our best estimate’ rather than data presented as an absolute. The challenge of tipping points According to a new report from Johan Rockström and some of the world’s leading authorities on climate science, exceeding 1.5C global warming could trigger multiple climate tipping points. These would put society at risk of grave harm and, in some instances, existential threat. Climate tipping points occur when changes in part of the climate system become self-perpetuating beyond a warming threshold. Tipping points can lead to rapidly accelerating and mutually reinforcing changes that are impossible for many species to adapt to. The flaw is that at 3C of warming, let alone 6C, there is an assumption the world will somehow function as it is. Given what we have seen more recently with the expediting and more frequently occurring extreme weather conditions (at 1.2C of warming), it’s clear it won’t. The problems with economics and climate modelling Steve Keen, an Australian economist, claimed in 2020 the mismatch between economists’ predictions of GDP and scientists’ predictions of the state of our planet lies in three main inaccuracies: Keen expanded on this in a report recently published in July 2023 with Carbon Tracker called Loading the DICE against pensions. The Dynamic Integrated Climate-Economy (DICE) model is the brainchild of Nordhaus, sterling professor of economics at Yale University. Keen argues that the Nordhaus approach relies on economic research that ignores critical scientific evidence about the financial risks embedded within a warming climate from climate tipping points. Keen further argues that a climate-induced ‘Minsky’ moment (a financial collapse) is inevitable. This is because scientists have argued, in peer-reviewed scientific papers, that 5C of global warming would lead to damages that are ‘beyond catastrophic, including existential threats’. What does this mean for us as investors? If the impact on GDP from a changing climate is inaccurate, then stress testing portfolios using the same mindset is even more so. Some pension funds have informed their members that 2-4C global warming will have minimal impact on their portfolios which, as Keen argues, is inaccurate and misleading. As investors, why should we stress test for climate change? And why are we doing it when we know it leads to critically flawed results? The answer lies somewhere in our discomfort with uncertainty. Even at 1.5C degrees of warming, it’s unclear what will happen. Beyond 1.5C, we’re in a world of the unknown. Most models don’t handle unknowns very well, but scientists specialise in them. This disconnect is part of the problem, but the most significant challenge is our collective unwillingness to make decisions without what we believe to be confirmative data. And by lulling ourselves into thinking we have enough data to make decisions, we risk blundering into an even bigger crisis. The current stress-testing models encourage us to do precisely that. By providing us with illusion of certainty, and underplaying the risks, we make decisions that ultimately worsen the situation and the outcomes.
Amy Clarke Chief impact officer, Tribe Impact Capital
That more extreme warnings from the scientific community should be diluted when surveying consensus
3
That the historical relationship between temperature and GDP can be used as a proxy for the future
2
That if an activity isn’t exposed to the weather, it will be unaffected by climate change
1
Amy Clarke presents the evidence for a new approach to testing portfolios and argues that current models are dangerously underplaying the true risks of climate change
Lottie Sweeney, head of research at MA Financial Media, explains the rationale behind adding climate and governance criteria to ESG Clarity’s Responsible Ratings index
In the three years we have been running the Responsible Ratings index (RRI) a lot has changed. What constitutes an ESG fund, as well as investor preferences for sustainability criteria, has adapted and most investors are now looking for more than an ESG rating. With that in mind, we have updated our criteria to bring in additional sustainability elements. First, using MSCI data, we are looking at whether funds are aligned with global temperature goals. Based on both reported and estimated Scope 1 and 2 carbon emissions, MSCI measures the carbon responsibility, efficiency and exposure attributed to an index or fund, and calculates alignment or misalignment, which we have incorporated into our RRI five-point scoring. We are also looking at fund exposure to ESG risks, such as climate risk; UN violations of the Global Compact; and controversies, as assessed by MSCI’s ESG Controversies methodology, which may be related to the environment, customers, human rights, labour rights or governance. Finally we have looked at board construction, both in terms of independence (the percentage of independent members) and gender diversity. Reshuffle results As a result, the top 25 funds in the RRI have notably changed since our last rebalancing, with the top four all climbing more than 10 places. This month’s top fund, Brown Advisory’s US Sustainable Growth, benefits from its low ESG risk exposure across the board, although this will likely stem from being mostly invested (40.2%) in big US technology companies. There are also four new entrants to the top 10, notably TB Evenlode’s income fund, which despite a majority weighting to UK industrials, has aligned the portfolio to global temperature goals and is seeking to decarbonise to net zero by 2050. Let us know your feedback or if there are any other criteria you think the RRI should measure by emailing lottie.sweeney@markallengroup.com
Natalie Kenway Editor, ESG Clarity
‘Investor preferences for sustainability criteria has adapted, and most investors are now looking for more than an ESG rating’
RRI ratings providers and methodologies
• Responsible Ratings Index (RRI) combines the scores of ESG ratings agencies. ESG Clarity’s bespoke index provides a comprehensive analysis of the top ESG funds available to investors. • Square Mile’s Responsible ratings combine a fund’s positive impact on the investor’s financial wellbeing alongside the positive impact it has on the world around them. Three factors are considered before being awarded a rating: exclusion – excluding those that have a negative impact on society or the environment; sustainability – rewarding and encouraging positive change and leaders in sustainability; and impact: those that have positive impact on society or the environment. • 3D Investing provides independent evidence of whether a fund or company lives up to its claims that it is ESG compliant. These are based on the 3D Investing Framework – Do Good, Avoid Harm, Lead Change. 3D investing is a subsidiary of Square Mile. • MSCI Ratings identifies the leaders and laggards in the ESG space. Based on their rule-based methodology, their seven stage ratings range from the top scorers (AAA, AA) to average (A, BBB, BB) to those behind when it comes to ESG (B, CCC). • Morningstar Sustainability ratings provide an objective evaluation of how funds are meeting ESG challenges. Each fund is ranked within their peer group. • MSCI ESG Fund ratings measure the resilience of funds to long-term risks and opportunities from ESG issues. • Overall Morningstar ratings award funds one to five stars based on past performance. These rankings are based on the performance over the past three years, with risk and costs also taken into consideration, and judged against funds in the same category. • Morningstar Analyst ratings provide forward-looking analysis of a fund based on five pillars: process, performance, people, parent and price. Top-scoring funds receive a ‘gold’ rating. • Implied Temperature Rise from MSCI ESG Research is an intuitive, forward-looking metric, designed to show the temperature alignment of funds with global temperature goals. • Fund exposure to climate tranistion risk and opportunities. MSCI provides a variety of metrics for assessing the carbon characteristics of an index or investment portfolio. Based on both reported and estimated Scope 1 & 2 carbon emissions, MSCI measures the carbon responsibility, efficiency and exposure attributed to an index or fund. • Aligned with best practices on board independence. The fund’s weighted average percentage of independent board of directors. Aligned with best practices on board diversity. The fund’s weighted average percentage of women on board. • Fund exposure to UNGC violations in accordance with the MSCI ESG Research methodology. • Fund exposure to red flag controversies are very severe ongoing controversies with the company’s direct involvement. Controversies may be related to the environment, customers, human rights, labour rights or governance, in accordance with the MSCI ESG controversies methodology. The percentage ‘%’ represents the sum of the weights and the numbers in brackets ‘(0)’ represent the count of fund holdings that are facing very severe ongoing controversies with the company’s direct involvement. Controversies may be related to the environment, customers, human rights, labour rights or governance, in accordance with the MSCI ESG controversies methodology.
Click for the top 25 Responsible Ratings index listings
Christophe Boucher, CIO of ABN Amro Investment Solutions, explains to Natasha Turner why the firm is preparing to add its name to the NZAM initiative
Big name departures from the Net Zero Asset Managers (NZAM) initiative are sure to make headlines, but it’s rarer these days to hear of firms joining. However, in a few months’ time, ABN Amro Investment Solutions will be doing just that. Christophe Boucher, CIO of ABN Amro IS, says it’s a natural step in continuing the work the firm is already doing. “We already have a commitment to net zero [the banking group joined the Net Zero Banking Alliance in December last year], so this isn’t a break or rupture, or something new.” He isn’t fazed by the criticism of the initiative, saying “my analysis of why some asset managers are leaving the group is there is pressure on financial performance and the financial duty for clients linked to the fact that if you are managing the carbon intensity of a portfolio it could lead to active risk. But our view is there is no opposition between financial performance and ESG quality, even though it can be challenging in certain market conditions.” ABN Amro IS had €18.5bn (£15.9bn) of assets under management as of the end of December last year and a range of 40 strategies covering all asset classes and geographical areas. It offers external funds and sub-advisory funds through exclusive partnerships. Generational shift Boucher became CIO at the asset management wing of the Dutch banking group in January this year, although it didn’t signify a major shift in his responsibilities as he had been acting as deputy CIO before that. He is based in Paris where he dials into our interview, while I am in the UK. In both our locations the temperature is above 30C, a reality that has not gone unmissed. “The real-life consequences are clear,” he says. “In private life as well as professionally it’s our responsibility to improve things and act as leaders and role models. I’m not into saying that changing my behaviour has no impact globally and for future generations,” he adds. “I have three children – we’re limiting travel and using less gas.” As well as wanting to leave the world in a better state for his children, Boucher notes the insight into sustainability gained from a younger generation. “The newer generation is very sensitive to such topics and that is linked to ESG preferences of clients. We can see some huge differences between clients depending on generation.” Watch the video interview with Boucher for more on ABN Amro IS’s manager selection process
Arguably the ESG preferences of the firm have also changed, adapting in line with increasing regulation and growing maturity around the topic. For example, its approach to choosing managers has changed drastically. “It used to be 40 mostly CSR-related questions, now we ask about 200 assessing the ESG process,” Boucher says. “We have an internal rating system for ESG that covers manager selection but also ESG commitment at the asset manager level, which might flag inconsistencies. We also assess engagement.” Like many in this space Boucher points to the growth and large-cap bias that many ESG funds can have. “It’s very difficult to find value ESG funds, we onboarded one not long ago – Boston Common – which has a value Article 9 fund,” he says. “This is very unusual, but it helps to have a nice, diversified portfolio. We can’t find robust, credible solutions with strong commitment on developed equities, for example, even on corporate investment grade, and it’s much more challenging in the emerging (markets) sectors.” Meeting challenges ABN Amro IS recently released its stewardship report for 2022, which showcases the engagements undertaken by its selected managers, such as Boston Common, Parnassus and EdenTree, as well as some of the collaborative engagement initiatives its managers have been involved with. But it also plans to update its engagement guidelines this year. “We are in the process of reviewing the engagement process and probably participating in some initiatives,” Boucher confirms. Similarly, the firm is developing a Principal Adverse Indicator (PAI) report. In the EU, managers are required to report on a set of indicators and metrics that aim to show financial market participants how certain investments pose sustainability risks in line with the Sustainable Finance Disclosure Regulation. Despite enthusiasm for the benefits this will bring, it is arguably the most challenging part of sustainability reporting – and has been met with some reluctance in the industry. Boucher says putting the report together is no easy task. “We are facing multiple regulators because our business model is open architecture. Clearly this is not so easy because you have different opinions regarding the regulator on ESG topics and the grey area with data. Sometimes if you’re facing a dilemma, you receive different advice from different regulators, which is quite challenging.” With an NZAM commitment, updated engagement guidelines and a PAI report all in the making, there’s a lot on the horizon for ABN Amro’s ESG team, which Boucher says has doubled in size over the past two years. “This is exciting,” Boucher says, “and a nice challenge at the same time.”
Click to read Christophe Boucher’s biography
‘There is no opposition between financial performance and ESG quality’
Christophe Boucher, CIO, ABN Amro IS
Christophe Boucher’s biography
Christophe Boucher is CIO of ABN Amro Investment Solutions. He is responsible for the firm’s investment process and leads the investment strategy through a combined qualitative and quantitative approach. Boucher supervises the company’s investment teams, including ESG, manager due diligence, operational due diligence, portfolio management and the quantitative research teams. Prior to this role, Boucher managed a team of quantitative analysts covering all asset classes. He was involved in the investment processes aimed at determining the strategic and tactical allocation opportunities as well as the security/fund selection and portfolio construction for ABN Amro IS. Boucher is also an Agrégé professor in economics and finance at the University of Paris Nanterre. He graduated in economics and finance, and holds a PhD in economics. Boucher received the ‘Young Economist Award’ in 2006 from the European Economic Association and the ‘Young Researcher in Economics Prize’ from the Banque de France Foundation in 2010.
Click to see ABN Amro IS’s Article 9 fund range
ABN Amro IS’s Article 9 fund range
ABN Amro EdenTree European Sustainable Equities This fund is composed of issuers that are either leading in ESG best-practice or attractive due to their progression in ESG. It is overweight the benchmark in financials, its highest-held sector, which had some of its highest performance-contributing stocks this quarter, notably Talanx, ING and BBVA. However, its overweight position in materials was the largest detractor in terms of performance, which included exposure to both chemical and packaging stocks as investors worried about a downturn in the global economy. The overweight to real estate, which suffered over the quarter as rate rises accelerated, also had a negative impact on performance.
ABN Amro Liontrust European Sustainable Equities Overweights to financials and IT also benefited this fund this quarter, with semiconductor businesses performing particularly well. Among the weaker performers for the period were Sartorius Stedim, Nagarro and Avanza Bank. Shares in bioprocessing equipment and consumables manufacturer Sartorius Stedim fell after lowering its full-year sales guidance, citing longer-than-expected inventory reduction among biopharma customers following the Covid-19 pandemic.
How can wealth managers and fund selectors engage with asset managers on labour rights at the companies they invest in? Wealth managers should directly ask their investment managers a series of questions on how they embed respect for human and labour rights into their investment process, and importantly how they perceive human rights risks. They should ask how managers evaluate human rights risks as part of their investment thesis for different asset classes and whether the firm takes a single- or double-materiality perspective on this risk. What policies are in place? Do they reference the UN Guiding Principles for Business and Human Rights? They should also assess the firm’s own engagement with the assets it holds – on both business and human rights risks such as labour standards, human rights and modern slavery. Can they give examples of when they’ve engaged with companies on labour rights issues and demonstrate outcomes? While direct engagement is key, it’s also important investors demonstrate their concern for labour rights and add to the weight of conversation within the community. They should call for more transparency and supply chain due diligence through collective and active participation in alliances and organisations such as the Investor Alliance for Human Rights and CCLA’s own Find it, Fix it, Prevent it initiative on modern slavery. What would you say are red flags? Clearly, a lack of openness or willingness to engage is a red flag, and specifically if a firm can’t point to examples of engagement on human and labour rights it suggests it’s not taken seriously as a material risk. Of course, the complete absence of a human rights policy is problematic. CCLA and ABN Amro have recently written to Nike about outstanding wage payments for garment workers and dismissals in factories in Cambodia and Thailand during the pandemic. How did this come to light? It’s no secret that suppliers shut down factories and made workers – some of the world’s most vulnerable people – redundant during the pandemic, as the industry cut orders and pulled back production. In this case, some Ramatex Group employees were dismissed and not paid legally owed partial wages during the shutdown, an issue that has been raised by various trade unions since 2020, with civil society organisations amplifying awareness. Earlier this year, the Worker Rights Consortium (WRC) published a report citing “credible and consistent” evidence these workers were employed at factories supplying Nike-branded clothing. There have been many failed attempts to seek remedy for the workers affected and the WRC’s report outlined the failures to provide remedy and called on Nike to show leadership and ensure the workers’ severance pay is paid. Do you often collaborate with other asset managers on engagement – is this a straightforward process? We do, because we see CCLA’s role as acting as an agent for change. We bring investors together to address systemic risks such as modern slavery and labour rights abuses. It is important to mobilise action on these issues that, frankly, often don’t receive the attention they deserve. It is only by changing the way the investment industry – en masse – approaches human rights that we will be able to bring about real-world change. We are proud that Find it, Fix it, Prevent it has gathered so much support – £15trn of assets – and this demonstrates how we can all be a catalyst for positive change in the investment industry. What was the Nike outcome? The specifics of the case, and our letter, were not discussed at the AGM, and Nike, as yet [as at 18 September], has not responded to us. A proposal filed by activist investor Tulipshare, which called for an effectiveness assessment of the company’s supply chain management infrastructure was, as expected, not passed, but this will not diminish shareholder calls for more transparency and supply chain due diligence. Aside from the obvious moral obligations, why is it important for asset managers to focus on issues such as modern slavery and labour rights? These issues present real operational and reputational risks for businesses and their investors, and this risk has been heightened by an increase in mandatory human rights due diligence legislation in recent years. This welcome legislation increasingly requires businesses to assess human rights risks they may be causing, contributing to or linked to, and obliging them to provide remedies to rights-holders that have been negatively impacted. For instance, in the US we have seen import bans for products manufactured with forced labour (Uyghur Forced Labour Prevention Act). These regulations mean that whether or not an investment management firm adopts a single- or double-materiality perspective, human rights risks will become more material for investors. Are there any disclosure frameworks fund selectors can refer to? Useful frameworks include the Corporate Human Rights Benchmark, the World Benchmarking Alliance Social Transformation Framework and the Workforce Disclosure Initiative. We are also watching the developments of a potential human rights reporting framework from the International Sustainability Standards Board, which we hope will deliver an effective and rigorous international standard. There are also engagement initiatives investors can join, such as: the UN Principles for Responsible Investment Advance programme; the Investor Alliance for Human Rights; the Platform Living Wage Financials; and CCLA’s Find it, Fix it, Prevent it initiative on modern slavery.
Dr Martin Buttle, better work lead, CCLA
‘While direct engagement is key, it’s also important investors demonstrate their concern for labour rights and add to the weight of conversation within the community’
Imap is UBP’s proprietary scoring system that judges the impact intensity of each stock and assigns it a score out of 20 – five points for intentionality, materiality, additionality and potential. A score of 12 is the minimum threshold for acceptance into the portfolio and watchlist.
Imap explained
Dr Martin Buttle Better work lead, CCLA
Semiconductors in the spotlight
Over the past 10 years, semiconductor companies have become an important area of investment for clean energy funds. However, exposure among managers varies and leads to very different outcomes
Opportunities arising from the energy transition haven’t gone unnoticed by investors. Demand for funds investing in the clean energy space have increased tremendously in recent years. Morningstar groups these kinds of funds in the equity alternative energy category, and for years, total assets under management hovered between €3bn (£2.6bn) and €5bn. In 2020, investors suddenly rushed into clean energy funds, and net inflows reached almost €13bn. The following year, another €12bn of new investor money flooded in. Inflows relaxed after that but remained in positive territory. As of July 2023, total assets stand at €38bn, or eightfold the level seen three and a half years ago. Over time, the clean energy space has changed. Roughly 10 years ago, the focus was mainly on companies operating in areas such as solar and wind or on utility companies, typically those that had started to phase out fossil fuels and replace them with renewable energy sources. It might come as a surprise, but 10 years ago, clean energy funds on average still had 10% allocated to the energy sector, including oil and gas companies. That exposure has decreased to 0.3% as of June 2023. Tech it to the top Instead, technology companies have been playing a more important role in the clean energy arena. The average exposure to the sector stood at 18.5% in 2013, but a decade later, clean energy funds have more than doubled their allocation to 37.8%. A large part of this growing exposure is related to the semiconductor industry, which saw its allocation triple from 7.6% to 24.2%. Semiconductors play a pivotal role in the energy transition. They are used in solar panels, wind turbines and electric vehicles. But they also play a vital role in making electric grids more efficient, in the storage of renewable energy and in appliances, by making homes and buildings energy efficient. Nevertheless, portfolio managers differ in their opinion as to where to draw the line in terms of exposure, as not all companies in the semiconductor industry offer the same pure exposure to the clean energy theme. For example, BGF Sustainable Energy and Schroder ISF Global Energy Transition have a relatively limited exposure to the sector at just below 20%, or well below the average allocation of peers. Instead, they have a much higher exposure to the utilities sector. Investors will have to determine themselves what type of exposure they want their clean energy fund to have. They should also be aware that the differences in portfolio composition can lead to wide variations in performance. This is evident when looking at returns in 2023. For example, the BlackRock fund has returned 7.49% for the year to date through the end of August 2023, while the Schroders fund lost 9.48%. This compares poorly to funds with higher exposure to the semiconductor industry, such as Polar Capital Smart Energy and RobecoSAM Smart Energy. Polar Capital Smart Energy This strategy is managed by Thiemo Lang. He and his team joined Polar Capital from RobecoSAM. He runs a Garp-oriented approach and invests in solution providers that enable the decarbonisation and thereby electrification of the global energy sector. This has increasingly led him toward investments in the semiconductor industry, which accounted for 35.7% of the portfolio’s assets at the end of July 2023. During the first eight months of this year, the fund returned 15.96%, driven by strong performance of semiconductor stocks such as Renesas Electronics, ON Semiconductor, Marvell Technology, Lattice Semiconductor and Monolithic Power Systems. Click here to see performance chart RobecoSAM Smart Energy Equities Roman Boner is the successor of Lang at RobecoSAM. He and his team have left the approach largely unchanged. Therefore, it is no surprise that 38.5% of the portfolio’s assets are invested in semiconductor stocks. Although the year-to-date return of 11.69% falls short of Polar Capital Smart Energy’s, it still stands out compared with many of its peers. This achievement was driven by the same semiconductor names held by the Polar Capital fund. Click here to see performance chart
‘Portfolio managers differ in their opinion as to where to draw the line in terms of exposure, as not all companies in the semi-conductor industry offer the same pure exposure to the clean energy theme’
Ronald van Genderen Senior manager research analyst, Morningstar
Performance has ticked up during the past 12 months
Performance standout among peers
Mathieu Nègre of the UBAM Positive Impact Emerging Equity fund, tells Natasha Turner about SDG alignment in emerging markets, and why the fund has seen limited competition in its three-year lifetime
How does the UBAM Positive Impact Emerging Equity fund find impact investments in emerging markets? We use a range of tools but Imap is definitely at the centre of the process because this is how we determine the alignment of companies with the UN Sustainable Development Goals (SDGs). [Click here for an Imap explainer.] We’re bottom-up and the way we score the impact of the companies we invest in is to take [geographical location] into account because it is part of the context. If you invest in a water utility in Brazil, some of the marginal capex that has been put into the ground will provide access to water to people who don’t have regular access. If you do the same in the UK, it’s not going to be the case. Using that context will give a higher impact score to those companies in those environments and that is used to determine the size of the position in our portfolio. The fund’s largest sector is financials, how is that justified? We’ve got about the same weight as the benchmark in financials, so it looks like we’re doing the same as a benchmark, but in fact we’re doing something different. In the benchmark you will find lots of banks, some of them state owned, most of them dealing with large corporate clients. We find more specialised financial institutions. Some of them are big, such as large banks that have an involvement with microcredit or financial inclusion in difficult territories. Usually, we look for at least a combination of the two – just offering continuous banking services across a nation is not enough to qualify as an impact investor. We also want to see the specific financial inclusion strategy that will make us comfortable this institution contributes to giving access to payments to people who traditionally have more difficult access. Beyond that, we also have investments in institutions that specialise in microcredit or in a type of asset-based lending that will give opportunities to small entrepreneurs to launch their business or to very small companies to develop that business in a way that is aligned with the SDGs. For example, Compartamos in Mexico was one of the first for-profit microcredit IPOs ever, and that’s IBM stock. And you’ve got a number of institutions that have a significant proportion of business happening in that micro or very small area in Latin America, India and south-east Asia. We have a significant number of opportunities in that area and that’s not the case in developed markets. You can’t really find the same type of exposure in western Europe or the US. So that is a way in which you can diversify. The fund is just over three years old now, what has reception and performance been like? We launched in the middle of the first Covid market downturn [May 2020] and that positioned UBP well from an asset allocation point of view, but also the fund itself captured the upside nicely because it came at the time when there was the EU Green Deal and China making a net-zero commitment. This was favourable for areas such as renewables energy equipment and electric vehicles that we invest in. Then we had difficult market environments in 2021 and 2022. Few asset managers have chosen to address sustainability [in impact emerging markets] so there’s a more limited offering meaning more limited competition. What do you think it will take to increase the focus on impact investing in emerging markets? It’s happening, but more slowly than we expected. It is quite a classic pattern in emerging markets that if something is thematic, it would be developed for a global equity audience first, and then come to emerging markets after that. People might wait to see how marginal [sustainability in emerging markets] will be before they do many declinations that will lead to new products. But also the fact that emerging markets have been underperforming might be a reason for the lack of appetite for new products. Talking about sustainability in emerging markets with clients usually leads to good conversations but the first question more often than not is how is it possible? Because they may have in mind a certain number of controversies, lower standards of regulatory standards in general when it comes to employee rights, environmental standards or rising emissions. So there’s a number of things that intuitively go against the concept of sustainability. But, of course, that doesn’t mean you shouldn’t approach those problems with companies. In a meeting we will often find ourselves in situations where we are the only ones on the table with sustainability-oriented questions. If you try to avoid controversies, you will not end up in the places where investment is needed.
Mathieu Nègre, portfolio manager, UBP
‘If you try to avoid controversies, you will not end up in the places where investment is needed’
Click for Mathieu Nègre’s biography
Mathieu Nègre’s biography
Mathieu Nègre has more than 25 years’ experience in portfolio management and investments, including 20 years covering emerging markets. He is the head of UBP’s emerging equities impact team and co-manages UBP’s impact emerging market strategy.
The need for urgent and significant action to combat climate change has fuelled worldwide demand for investments focused on decarbonisation. Real estate is responsible for almost 40% of global final energy carbon emissions, so is a key sector to meet the goals of the Paris Agreement. There are several key reasons that property decarbonisation could benefit future returns in listed real estate. Lower cost of capital Companies that prioritise decarbonisation should have superior access to, and better pricing for, equity and debt capital relative to their peers. This could be a key competitive advantage in a market with tight financial conditions. Transparency has been rewarded in this regard. Those that disclose Scope 3 carbon emissions can enjoy a cost of capital 20 basis points lower than those that do not disclose. Real estate businesses focused on carbon reduction also have access to the green bond market — a rapidly growing source of capital, as shown in the figure below.
‘Planning and implementing carbon emission reduction plans now means real estate companies should be able to mitigate the expense of future penalties’
Ben Kerl Head of real estate investments and portfolio manager, Nuveen Global Real Estate Carbon Reduction
Source: Bank of America Global Research as of 31 Dec ’22. Labelled bonds (sometimes referred to as impact bonds) are those that have specific ESG or sustainability objectives.
Hedge against future liabilities As global scrutiny of carbon emissions becomes more of a focus, regulators are increasingly imposing taxes or penalties on landlords who exceed global greenhouse gas thresholds or own buildings that do not conform to minimum energy efficiency standards. In Canada, for example, a carbon tax of can$65 (£38.7)/ton is set to increase to can$170/ton by 2030, and in the UK, it is now illegal to let out a commercial building with the lowest two EPC classifications. The latter demonstrates this is not an issue that can wait to be dealt with in several years; it is critical today. It also explains why the market is rewarding real estate owners that are making long-term investments to decarbonise their properties through onsite renewable and energy efficiency. By planning and implementing carbon emission reduction plans now, companies should be able to mitigate the expense of future penalties and as such have the potential to deliver superior long-term risk-adjusted returns compared with peers ignoring this structural trend. ‘First mover’ advantage on new revenue sources For real estate companies that are ready to act fast, investing in assets that lower carbon emissions could also be beneficial to revenue streams, which often are boosted by government subsidies. One clear example is in the installation of solar panels on buildings, which turn a liability of a roof into a valuable income stream from electricity generation. Companies have demonstrated unlevered internal rates of return from these investments exceeding 10%, which is an attractive balance of risk and reward. Preferred partner for private investment Even without a regulatory push towards lower emissions, making assets more energy efficient can pay off for real estate companies. This is because many tenants have their own corporate emissions reduction or net-zero targets. Operating from real estate, whether it be headquarters, shops or logistics facilities, with the lowest carbon footprint is a key method for reaching these goals. This could translate into better financial returns for more energy efficient assets via a rental and valuation premium, compared with assets with weaker environmental credentials. For example, the industrial real estate asset class consists of nearly 15bn sq ft of space in the US alone and the relatively flat rooftops present a compelling growth opportunity for solar energy generation. The C&I solar rooftop market is underpenetrated today, with only around 5% of the US market for commercial solar installations developed and more than 3,000 potential sites for installation which could produce nearly 12TW of electricity. Publicly traded landlords like Prologis are beginning to take action in this underpenetrated market, with over 400MW of solar already installed across its global portfolio; in the US, Prologis is ranked second by installed onsite solar capacity at over 200MW. Investing in real estate companies that are reducing their emissions in line with the goals of the Paris Agreement is compelling from both an environmental and an economic standpoint. For investors, current attractive valuations and income return, robust dividend growth and healthy fundamentals are offered in many Reit sectors. On top of this, investing in these companies helps them further their environmental goals of carbon reduction to generate tangible impact on climate change.
Labelled bond share of total investment-grade corporate supply has soared (%)
