sponsored by
The versatility of ESG is astounding. With companies scrambling to embrace new policies to get aboard the ethical framework, what we are seeing is an investor-driven movement aimed at bettering the corporate landscape, and a permanent change in attitudes. In this edition of ESG In Focus, we home in on companies both old and new to examine the scope of corporate carbon emissions and the impact created by technology in tackling climate change. Can ESG really deliver on what it promises?
Citywire Engage
Get in touch
Richard Lander Director, Citywire Engage Amy Maxwell Managing Editor, Citywire Engage Joanne Wells Head of UK Business
2020 was a watershed year, can profit and purpose be sustained?
Chapter 1
Old world, new world
A long-term highly active, growth-focused approach to sustainable investing
Decoding ESG
sponsored by AEGON ASSET MANAGEMENT
Tips on how to improve this integral part of the ESG process
Chapter 2
Scoping out carbon emissions
Sustainable wealth creation that enriches investors, benefits society and preserves the environment
Vanguard SustainableLife active funds
sponsored by Vanguard
Uncovering attitudes towards sustainable indexing
Investors' top five ESG challenges
sponsored by ishares by blackrock
Citywire introduces thematic sectors including ecology, clean energy and wate
Chapter 4
Will technology save us all?
Why paying more attention to the ‘S’ makes economic sense
Less than 150 days to go...
sponsored by nordea asset management
Chapter 3
Attention turns to green bond funding
Decodinng ESG
Terms and Conditions - Cookies - Privacy Policy
The focus for ESG investors is increasingly falling on where they can make the most difference. We ask a handful of fund managers focused on sustainable UK stocks to give one example of an ‘old world’ company and one of a ‘new world’ company that they believe will drive real change.
Old world: Tate & Lyle ‘Though often associated with bags of sugar on supermarket shelves, Tate & Lyle has been “sugar free” since 2010 when it sold its granulated sugar business. Reinventing itself as a food and beverage solutions business has meant developing ingredients to drive meaningful improvement in people’s diets. Through its low-calorie alternatives to sugar it aims to remove nine million tonnes of sugar from customers’ products by 2025, equivalent to 250 billion cans of coke.’ New world: SEGRO ‘SEGRO owns and develops warehouses that provide distribution capabilities to support the growth of e-commerce businesses, like Amazon and Ocado. The company is also leading the charge in reducing greenhouse gas emissions from buildings. In 2021, it committed to being net-zero carbon by 2030, ahead of a sector pledge of carbon neutrality by 2050. It is designing new buildings with lifetime footprints in mind and is driving the adoption of renewable electricity by its tenants.’
‘Companies like BP can provide the financial firepower to accelerate the transition to a low carbon world’
Nigel Yates, AXA Framlington
Alexandra Sentuc Co-Manager, JPM UK Sustainable Equity
Making a difference when investing in British businesses doesn’t necessarily mean backing shining new things
By Jennifer Hill
Old world: Drax ‘Drax is a classic example of a company shifting from ESG “sinner” to “saint”. Once owner of the largest coal-fired power station in the UK, it is now our largest source of renewables. In recent years, the business has undergone a transition to sustainable biomass, stopping the use of coal on a commercial basis in early 2021. The company has ambitions to be the world’s first carbon negative business by combining biomass with carbon capture and storage.’ New world: Music Magpie ‘Music Magpie is one of the UK’s leading “re-commerce” businesses focussed on the circular economy of consumer technology. Electronic waste is thought to account for up to 70% of toxic waste sent to landfill and the current rate of responsible electronic waste recycling stands below 20% globally – giving a lot of opportunity to capitalise upon. By offering price promises, refurbishments and warranties on all consumer electronics, Music Magpie’s consumer proposition is strong.’
Matthew Bennison Manager, Schroder Sustainable UK Equity
Old world: BP ‘BP is undergoing a radical reorganisation to become an energy company with purpose. It plans to shrink its oil production and produce 50GW of renewable energy by 2030. Transition growth businesses will be more than 40% of BP’s capex by 2025 and 50% by 2030. Companies like BP can provide the financial firepower to accelerate the transition to a low carbon world. It also has unique engineering expertise in areas like carbon capture, use and storage, and hydrogen.’ New world: Ceres Power ‘Ceres has an important role to play in the clean energy transition. Its fuel cell technology has the flexibility to act as both a transition pathway (natural gas) and long-term net zero solution (green hydrogen) to our energy needs. Its world-class, scalable technology really comes into its own in off-grid applications like transportation. Bosch estimates decentralised power generation to be worth €20bn (£15bn) by 2030. The technology could also provide a solution to electricity grid intermittency and capacity issues.’
Nigel Yates AXA Framlington UK Sustainable Equity
Old world: Shell ‘Alongside cleaning up its own operations, Shell is working with its customers to find cleaner fuel solutions, such as industries switching from coal to gas, and homeowners switching to renewable energy sources. Shell has the broadest global exposure to cleaner power solutions and can thus drive real change. It seeks to be a global leading provider of hydrogen and biofuels, offer carbon capture as a service, build floating offshore wind farms and have the largest global electric charging network.’ New world: Intertek ‘For more than 130 years, Intertek has provided assurance, testing, inspection and certification services. We believe it has a critical role in independently measuring the progress companies are making towards their ESG targets. We need global standards, testing and certification of the carbon neutral and green energy claims. Last year, Intertek issued the world’s first CarbonZero certification for a global oil company’s fuel-cargo. Fair labour conditions and ethical sourcing also need independent verification.’
Tineke Frikkee Head Of UK Equity Research,Waverton Investment Management
More articles:
At Aegon AM we launched our first ethical fund in 1989 and over three decades have built a range of specialist ethical and sustainable funds. Through our dedicated responsible investment team we have integrated environmental, social and governance across multiple asset classes, strengthening our active ownership and expanding our range of funds to meet the evolving needs of clients. This means we’re relatively well-placed to decode the range of terms which are commonly used to describe responsible investment funds. Figure 1 shows a spectrum, with traditional investments at one end and philanthropy (the ultimate statement of impact) at the other. We believe there are four main categories in-between: exclusions, best-in-class ESG, sustainability-themed and impact investing.
This might be the opportunity to reset and make the kind of intuitional changes and policy choices that will lead to a better, greener and more sustainable future
Miranda Beacham Head of ESG for equities and multi-asset at Aegon Asset Management
Sponsored content by
Important information For Professional Clients only. Capital at risk. All investments contain risk and may lose value. Responsible investing is qualitative and subjective by nature, and differs by region. There is no guarantee that the criteria utilized, or judgement exercised, by any company of Aegon AM will reflect the beliefs or values of any one particular investor. There is no assurance that the responsible investing strategy and techniques employed will be successful. Opinions are used to promote Aegon AM’s investment management capabilities: they are not investment recommendations, research or advice. This marketing is not prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing by Aegon AM or its employees ahead of its publication. The document is accurate at the time of writing but is subject to change without notice. Aegon Asset Management UK plc is authorised and regulated by the FCA. AdTrax: 4476530.1 Exp 31 Dec 2022
WORDS BY:
A range of ESG-related terms has entered the investment lexicon in recent years. Some of these mean different things to different people, leaving some investors struggling to decipher the terminology.
Market forces
EXAMPLES OF FOCUSED RESPONSIBLE INVESTMENT SOLUTIONS
Deliberate impact
PHILANTHROPY
SUSTAINABILITY-THEMED
IMPACT INVESTING
EXCLUSIONS
BEST-IN-CLASS ESG
TRADITIONAL INVESTMENTS
Measured environmental and social impact
Environmental and / or social themes
ESG opportunities
ESG risk management
Competitive financial returns
ESG INTEGRATION & ACTIVE OWNERSHIP
Figure 1: Spectrum of responsible investment solutions
Exclusions represent the longest-established form of responsible investment. They involve screening-out certain sectors, companies or practices based on specific ESG criteria. Sometimes the exclusions reflect legal or company requirements, but mostly they align what we decide not to hold with the preferences of clients. To help us stay tuned to the demands of clients we talk to them regularly about their preferences and conduct a formal survey every two years. This is an approach used in our ethical funds and is valued by clients for its simplicity and transparency.
Beyond ESG integration and active ownership, Aegon AM provides a range of dedicated responsible investment solutions. From client-led exclusions and best-in-class selection to sustainability-themed strategies and impact investing, we have designed solutions to help clients align their financial and ESG goals.
Starting with ‘traditional investments’ these benefit from ESG integration and active ownership, which most managers now offer (although some managers are more integrated and more active than others). ESG integration is typically part of the bottom-up research process whereby managers assess ESG factors as part of a holistic fundamental assessment - it applies to traditional and focused responsible investment solutions. While focused responsible investment solutions also integrate ESG factors, they take responsible investing a step further by incorporating specific ESG or sustainable investment criteria. Most categories of responsible investing are seeking competitive financial returns. Let’s look at each of the four categories.
Best-in-class ESG funds seek to outperform by emphasising positive selection of stocks or bond issuers with favourable ESG profiles. These ESG-focused funds take a balanced approach to economic and ESG investing. A significant and growing body of academic research shows that good ESG practices can enhance long-term corporate financial performance. This value can manifest itself in the form of access to capital, better operational performance, reduced reputational risks and in turn, potentially superior long-term returns. A best-in-class approach is based on research which takes place during the ESG integration process. In fixed income markets, for example, it focuses on mitigating ESG-related risks through the positive selection of bond issuers with more favourable ESG profiles while avoiding issuers with high ESG risk.
We have been managing sustainability-themed funds since 2015 and this is the fastest growing part of our responsible investment range. These focus on companies and bond issuers which are aligned with sustainability themes, with the aim of generating long-term outperformance. There is an evolution towards sustainable products and services, encouraging a growing number of companies to provide solutions to key sustainability challenges. This is presenting opportunities for investors who want to generate competitive long-term returns while contributing to a more sustainable world. Our sustainability-themed funds centre around a set of investment opportunities which contribute to a range of sustainability challenges or trends. Our dedicated responsible investment team provides an independent sustainability assessment of our equity portfolio holdings.
The fourth category is impact investing, which pursues financial returns alongside measurable positive social and/or environmental impacts. At Aegon AM we have developed impact investment strategies to align portfolios with sustainability goals and use capital to drive environmental and social impacts. Our approach builds on two key characteristics: 1. Ex-ante intentionality, whereby we outline the intended positive environmental or social impact as part of the investment decision-making process; and 2. Ex-post measurement, which consists of monitoring our progress, measuring and reporting impact after the investment is made.
Back in 1998, the World Resources Institute and World Business Council for Sustainable Development jointly convened the Greenhouse Gas Protocol. Today, the protocol is widely viewed as the global standard for greenhouse gas accounting, defining three different types or ‘scopes’ of emissions that businesses should consider. ‘Categorising and calculating the sources of various emissions matters because companies can effectively manage what they measure, including establishing targets and climate action plans for emissions reductions and removals – both critical strategies in addressing climate change,’ said Eric Cooperstom, managing director for impact investing and natural climate solutions at Manulife Investment Management. Effective reporting Of the three scopes, one and two are the easiest for a company to measure and manage against. Scope one emissions are those that a company emits directly through its production or manufacturing. Scope two are those used to fuel a company’s operations, such as those associated with electricity consumption. ‘By understanding your scope one and two carbon emissions, you can identify opportunities to implement energy efficiency measures, cut cost and reduce emissions with both economic and environmental benefits,’ said Louise Gow, global health and safety environmental manager at Invesco. Scope three emissions relate to the company’s value chain and are the hardest to monitor and measure as they are often out of its direct control. Examples include use and end-of-life treatment of sold products and leased assets (see chart). ‘Due to the complexities associated with capturing data for scope three emissions, reporting can be ambiguous and is the subject of much discussion,’ said Gow. Limited disclosure For many companies, especially those in the automotive and oil sectors, scope three emissions dwarf everything else. However, disclosure is limited. ‘At present, disclosure of scope three emissions is very limited, with less than 20% of listed companies reporting this data,’ said Sophie Lawrence, senior ethical, sustainable and impact researcher at Rathbone Greenbank Investments. ‘To successfully manage upstream scope three emissions, companies need to take a long-term view with suppliers, engage in collaborative programmes to improve sustainability performance and consider climate factors during supplier selection. ‘Reducing downstream scope three emissions requires significant innovation to embed low carbon and circular principles into product design to reduce in-use and end of life climate impacts.’ Leased assets are a source of both upstream and downstream scope three emissions. LGIM Real Assets is working to reduce both. On downstream emissions, it has incorporated green clauses in its leases since 2011 and now screens all new tenants on ESG grounds. Its new occupier engagement platform, Vizta, aims to support the gathering of occupier ESG data and drive action through stronger relationships with occupiers. A key focus to reduce upstream emissions, meanwhile, is choosing to refurbish rather than redevelop. ‘The impact of this can be seen at North Quay House, Bristol, where our approach of using the existing structure, rather than building new, has resulted in us being on track to achieve embodied emissions of around 30% below industry net-zero targets,’ said sustainability manager Malcolm Hanna. Powerful signals Certain sectors play a key role in unlocking decarbonisation within scope three emissions, according to Rathbone Greenbank’s Lawrence. For example, net-zero solutions in shipping and freight have the potential to reduce scope three emissions across several other sectors. Scope three emissions are gradually being introduced to EU climate benchmarks too, with the mining and energy sectors included in 2020 and transportation, construction, materials and industrials being added by the end of 2022. For Jess Williams, a responsible investment analyst at Columbia Threadneedle Investments, backward-looking disclosures must be paired with forward-looking targets. ‘With more companies signing up to net-zero targets via initiatives such as the Race to Zero and plans by the UK government to ask companies to publish transition plans, this data is only going to increase in importance,’ she said. For Jon Wallace, manager of the Jupiter Ecology fund, targeting reductions through lower scope three emissions is a growing area of focus, particularly for companies with a low direct carbon footprint. ‘For these companies in particular, scope three insights are essential for a credible ambition, and we are seeing clear signs that larger corporates are sending powerful signals up their supply chains, driven by scope three emissions measurement and reduction,’ he said.
‘At present, disclosure of scope three emissions is very limited, with less than 20% of listed companies reporting this data’
Sophie Lawrence, Rathbone Greenbank Investments
Scope one, two and three carbon emissions – what do they mean and why do they matter?
Greenhouse Gas Protocol scopes and emissions across the value chain
Source: The Greenhouse Gas Protocol
Investors in Europe, the Middle East and Africa (EMEA) expect to dramatically increase their sustainable assets by 2025. Percentage of assets invested sustainably, current and projected Here are the top five challenges that European investors face amid this shift.
We believe there is an iShares approach for every sustainable investor.
Manuela Sperandeo EMEA Head of Sustainable Indexing at BlackRock
BlackRock Global Business Intelligence (as of Jun 30, 2021) BlackRock as of Dec 2021. Based on a review of select investment stewardship reports in 2020-2021. In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England and Wales No. 00796793. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam. Trade Register No. 17068311. For investors in South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Conduct Authority, FSP No. 43288. For investors in Switzerland: This document is marketing material. 2022 BlackRock, Inc. All Rights reserved. 2080433
of the assets within BlackRock’s Multi-Asset Portfolio ESG ETFs seek to track indices that meet certain ESG criteria.
Funds that seek to track indices that eliminate exposure to certain business areas.
21%
47%
2020
2025P
Source: BlackRock Global Client Sustainable Investing Survey (as of July – September 2020)
Building a sustainable portfolio tailored to specific requirements can be time consuming, and the financial and sustainable impact may be unclear. Our approach iShares offers transparency for investors across all our sustainable ETFs. Investors can: Evaluate a fund based on various sustainability characteristics on iShares ETF product pages. Build a portfolio using iShares sustainable ETFs as core building blocks. For investors looking for a ready-made portfolio:
RISK: The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply to similar ESG considerations to their investment process.
1
80%
Transitioning your portfolio
Source: BlackRock’s 2020 sustainability actions (as of November 2020)
2
Investors must be able to find and interpret ESG data so they can assess the measurable output of their investments. Our approach At iShares, we are driving a push for standardisation across the industry to bring consistency and transparency to all investors. In 2021 • We leveraged over 1,200 sustainability metrics within Aladdin, our risk and portfolio management system. • We also strengthened multiple partnerships with data analytics firms.
Making sense of the data
(1) BlackRock Global Business Intelligence (as of Jun 30, 2021)
3
Almost 50 new sustainable Exchange Traded Funds (ETFs) were launched in Europe in the first half of 2021 alone. (1) With so many sustainable products, investors need clarity navigating the options. Our approach To help investors choose an ETF that aligns with their goals, all iShares ETFs are classified according to BlackRock’s Sustainable Investing Framework:
Choosing the right product
Screened
ESG Broad
ESG Thematic
Impact
Funds with an explicit ESG objective, which may include a targeted quantifiable ESG outcome.
Funds with a focus on a particular Environmental, Social, or Governance theme.
Funds that seek to generate a measurable sustainable outcome alongside a financial return.
For illustrative purposes only. The above list is not exhaustive but represents various ways investors can take specific climate objectives into consideration.
4
Climate change has emerged as a crucial factor for investors to consider, yet investors often aren’t sure how to incorporate climate considerations into their portfolio. Our approach BlackRock has three approaches to climate investing to help investors select the best climate option for them. Reduce exposure to carbon emissions or fossil fuels In action: Minimising or eliminating companies that have high carbon emissions relative to their sector peers. Prioritise companies based on climate risks and opportunities In action: Increasing the weighting of companies based on their commitments to align with Paris Agreement temperature goals. Target climate themes and impact outcomes In action: Investing in a specific sustainable activity or project, such as clean energy.
The emerging climate trend
65%
*54% of the entire 2020 244 climate-focus universe. Source: BlackRock, Institutional Shareholder Services (Data as of July 8, 2021 reflecting data from July 1, 2020 through June 30, 2021). (2) BlackRock as of December 2021. Based on a review of select investment stewardship reports in 2020-2021.
5
3,650 unique engagements—2,330 of these were based on climate Of the companies BlackRock identified as not adequately managing their climate risk in 2020, 65% have made meaningful progress this year*
Investors want to ensure their sustainable fund provider is driving long-term value through engagement with companies. Our approach iShares is backed by BlackRock's investment stewardship team, which is one of the largest in the industry (2). The team has more than 50 members and is located in 10 offices around the world. This enables the team to engage with companies frequently, armed with a sound understanding of local governance norms. In fact, during the 2020-2021 proxy year, the team's engagements with investee companies hit a new record. Engagement by the numbers Voting at shareholder meetings is the broadest form of engagement. The team voted on more than 165,000 proposals during the year.
Company engagement
2,330
3,650
45,602
Americas
Europe, Middle East and Africa
50,500
Asia Pacific
69,636
Capital at risk. The value of investments and the income from them can fall as well as rise are not guaranteed.
To learn more about investing in sustainable ETFs, visit iShares.com
The need for green finance in emerging markets is one of the most urgent issues that ESG investing needs to tackle. The Organization for Economic Co-operation and Development (OECD) estimates $2.5tn (£1.8tn) in financing needs will be required by developing countries in order to achieve the United Nations’ Sustainable Development Goals (SDGs). And the pandemic has only added to the financing problems, adding an estimated $1.7tn to the bill. But, as a recent progress report from the Sustainable Banking and Finance Network (SBFN) highlights, aligning just 11% of global finance with the SDGs could fill that gap. While the need is great, the opportunities are also significant. ‘The International Finance Corporation [IFC] estimates over $23tn in investment opportunities in green and climate-related sectors and activities that can help achieve national goals aligned with the Paris Agreement and accelerate the global transition to a low carbon economy. Most of this capital will come from the private sector,’ it says. The report highlights a number of emergent themes that can contribute to tackling the problem, including deepening of national ESG risk management frameworks, the growing need for data to understand ESG risks as well as opportunities, and the growing popularity of green and climate bonds, as well as the expansion into social and sustainability bonds. Nevertheless, green bond financing does not seem to be prolific in the areas where it is arguably most needed. Issuance of green bonds in emerging economies continues to lag in developed economies, and the gap seems to be growing. As Jonathan Amacker and Charles Donovan of Imperial College Business School Centre for Climate Finance and Investment pointed out last year: ‘Of the $1tn of green bonds issued globally, less than 20% are from developing markets. Latin America and Africa combined make up less than 3% of global green bond issuance.' Of the top 25 country weights in the EM sovereign bond index, only four have ever issued a green bond, they said. ‘The overall numbers are still very small given the huge funding needs.’ Key to addressing this shortfall will be the attitude of green investors in developed markets. ‘A critical factor will be whether the large pools of green-dedicated capital, mostly large European investors who are more comfortable investing in DM green projects, can be tempted to move down the credit curve in a meaningful way and buy EM debt. Otherwise, EM green bonds will be mostly held by the same EM funds who would buy vanilla bonds just as well.’ Fund managers point out that they are not standing still: the largest dedicated EM green bond vehicle, Amundi’s Planet Emerging Green One - which launched in co-operation with the IFC - noted that during 2020, despite the virus-driven disruption across the globe, it was able to participate in new issuances from first-time issuers of EM green bonds, including Brazil, Turkey and Qatar. ‘Notably, we were able to help debut issuers place their first-time issuances through private placements,’ said Yerlan Syzdykov, the company's head of emerging markets.
‘A critical factor will be whether the large pools of green-dedicated capital, mostly large European investors who are more comfortable investing in DM green projects, can be tempted to move down the credit curve in a meaningful way and buy EM debt’
Jonathan Amacker and Charles Donovan, Imperial College Business School Centre for Climate Finance and Investment
The need for green finance in emerging markets is one of the most urgent issues that ESG investing needs to tackle
Developed markets ($M) Emerging markets ($M)
Green bond sovereign issuance as of March 15, 2021. Source: Data provied by Environmental Finance.
Responsible investment has been hitting the headlines in recent years as more and more investors want to align their assets with their personal beliefs, but this year there has also been a lot of behind-the-scenes activity as regulatory changes around ESG products have been introduced. The next changes – and possibly the ones with the greatest impact on advisers – are the changes to MiFID II, which come into force on 2nd August, 2022. Did you know that in a matter of months, advisers will have to raise ESG topics with clients in a way they never have before? That in order to do this, they – you – will need a robust grasp of the sustainable investments and a range of ESG funds to go with it? But let’s scroll back a bit to look at what’s actually happening. Over last several years, EU regulators have introduced a raft of new initiatives to improve disclosure levels and overall investor understanding of sustainable investments. The ultimate aim is to direct investment towards a more sustainable future, and the roll-out is continuing. The next major stop on the regulatory journey, however, is the amendment of the MiFID II regulation – which comes into effect on 2nd August 2022. This is the piece of regulation that will have the most profound impact on the day-to-day business of financial advisers. The clock is ticking… Among a host of MiFID II requirements the most significant change for distributors and financial advisers is the need to incorporate sustainability preferences in the overall client suitability assessment. While some advisers and distributors are already discussing sustainability preferences with clients, this will soon become something everyone must do. If the end investor does have sustainability preferences, the distributor or adviser will have to offer a suitable product. With only months to go, distributors and advisers need to build their lists or portfolios of suitable products so they do not face their clients with nothing to offer. Although August 2022 may feel quite a way in the distance, the clock is ticking, and there is a lot of preparation to be done. The right building blocks to set up a MiFID-eligible ESG portfolio? At Nordea Asset Management (NAM) we have been at the forefront of the responsible and sustainable investment space for more than three decades, ever since the launch of our first ESG sector-screened strategy. More recently, we have invested into our suite of specialist solutions to ensure we can offer all the building blocks needed for distributors and advisers to construct their sustainable offerings. These building blocks include NAM’s range of ESG STARS strategies – which offers strategies across various regions (Europe, Nordic, EM, Asia, North America, Global) and different asset classes (equity, sovereign-, corporate- and high yield bonds). Each ESG STARS strategy seeks to identify the sustainable leaders of tomorrow and has three primary objectives(1): • beat the benchmark, • invest in companies or countries displaying positive ESG standards and • create a lasting impact. Our ESG STARS range is built on the belief that companies and issuers that integrate ESG metrics into their strategic decisions will be tomorrow’s winners. All Nordea’s ESG STARS strategies meet the sustainability requirements for MiFID distribution. Taking ESG seriously The ESG STARS are built on a solid ESG framework, utilising full ESG integration with a focus on active ownership. We integrate ESG considerations into all our investment solutions, with certain firm-level elements applicable to all our holdings. These include voting and engagement, our companywide ESG limits and exclusion list, individual ESG analyses of businesses, and the provision of ESG data and research to all portfolio managers. However, we take integration a step further in our ESG-enhanced products including the ESG STARS strategies. The ESG STARS strategies utilise a number of ESG approaches, and they currently consider the Principal Adverse Impact (PAI) on up to 20 sustainability factors (e.g. carbon footprint, non-recycled waste ratio, gender pay gap, anti-corruption policies etc.) from 6 themes (GHG emissions, water, biodiversity, waste, social and employee matters, human rights). The ESG STARS can contribute to a net-zero portfolio, as they generate a lower carbon footprint than their benchmarks. Choosing the right ESG partner can make the difference With only months to go until the implementation of these changes to MiFID II, distributors and financial advisers should start building a list of suitable funds they can offer to clients with sustainability preferences. For this process, finding an ESG partner they can trust becomes more important than ever. At NAM, with our years of experience in ESG investing and our broad range of suitable products, we want to be a strategic partner for our clients over this journey and are committed to helping them every step along the way.
(1) There can be no warranty that an investment objective, targeted returns and results of an investment structure is achieved. The value of your investment can go up and down, and you could lose some or all of your invested money. Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches and subsidiaries. This document is advertising material and is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. This document may not be reproduced or circulated without prior permission. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and/or subsidiaries.
Are you ready for MiFID and ESG?
Technology rose to the challenge of the Covid crisis, allowing scientists to fast-track research and setting a precedent for future vaccine development. It now stands to solve the climate catastrophe. But just how realistic are expectations of a tech utopia? ‘With science-fiction-like advances becoming daily occurrences, it’s easy to fall into the trap that there are no limits to what a given technology can do,’ Bob O’Donnell, president and chief analyst of TECHnalysis Research, said. ‘I hate to say it, but it’s the fake news of tech.’ He believes unbridled anticipation for ‘a tech-driven nirvana’ that jars with modern-world reality is starting to have negative implications of its own. Placing self-driving vehicles on a pedestal, for example, is the wrong way to go in his view. ‘Realistically, we are still a very long way from having a physical, legal, economic and political environment for autonomous cars to dramatically impact the transportation needs of most consumers,’ he warned. Even so, not all technologies have to be universally applicable to make a difference. According to O’Donnell, it’s about managing expectations: ‘If we view [tech industries] within a more limited and, in some cases, more specialised scope, then we’re much more likely to accurately judge what they can or cannot do. That’s not a limit, it’s a value.’ When aspirations meet reality Chris Mellor, head of EMEA ETF equity and commodity product management at Invesco, also calls for a more nuanced approach towards technology and cautions against overestimating its impact in areas like environmental engineering. The latter, he believes, isn’t nearly developed enough to provide any tangible benefits, at least not in the short to medium term: ‘There will be technologies that can solve some of the environmental problems we have today, but in a lot of cases we still don’t have an answer. If we think about [environmental engineering] in terms of carbon sequestration and putting out large sheets of white material to reflect more sunlight, there’s still a lot of work to do.’ Dirk Hoozemans, fund manager at Triodos Investment Management, agrees. ‘Typically, geo-engineering is a last resort,’ he said. ‘It can help alleviate some climate problems in the short term, but it’s not a sustainable and long-term solution.’ For Hoozemans, the focus shouldn’t lie on developing fancy gimmicks like space sunshades but on dealing with the root problem: ‘Just treating the symptoms isn’t enough. We need to tackle the underlying cause - and that means we must reduce our dependence on high-emission fuels.’ In his opinion, the quickest way to do so is by going electric. ‘Electrification is key,’ he stressed. ‘I’m well aware that there’ll still be gasoline and diesel car fleets in 10 years’ time because price and range can be limiting factors to buying an electric vehicle. But even if that’s the case, we’ll hopefully have electrified such large chunks of the economy that our carbon output has shrunk dramatically.’ The electrification and decarbonisation theme runs like a common thread through Hoozemans’ small and mid-cap portfolios, which include Landis+Gyr, a smart meter manufacturer, battery company Freyr and Acciona Energias Renovables, a renewable electricity provider. All in all, Hoozemans is ‘pretty confident’ that technology can deliver a timely solution for the climate catastrophe. ‘If anything,’ he said, ‘tech has driven progress throughout the history of humankind. The more imminent a problem becomes, the smarter the solutions we tend to think of.’
‘With science-fiction-like advances becoming daily occurrences, it’s easy to fall into the trap that there are no limits to what a given technology can do’
Bob O’Donnell, President and chief analyst of TECHnalysis Research
The seemingly unstoppable tech frenzy doesn’t herald the end of the world as we know it, but it opens a new chapter in the history of humankind
By Kathrin Schindler
At Vanguard, we have launched a range of actively managed funds designed to deliver value to investors who want to generate long-term growth from their investments, alongside the incorporation of sustainable investment criteria. Vanguard’s SustainableLife range is a suite of three active multi-asset funds with targeted allocations to equity and fixed income securities. The launch represents our commitment to helping investors balance their personal values with their financial goals as interest in sustainable investing continues to grow. On this basis, we created the new funds with four sustainability principles in mind: a commitment to underlying companies having a net-zero carbon footprint by 2050; the exclusion of companies that may have a negative impact on society and the environment; a commitment to engage with portfolio companies on ESG issues; and the requirement that companies follow good governance practices. In this article we look at how the fund management team incorporates environmental, social and governance (ESG) considerations into its investment process, and its approach to company engagement in particular. Introducing Vanguard SustainableLife active funds The Vanguard SustainableLife range offers an all-in-one portfolio of equities and bonds. There are three to choose from and each with a different risk profile: the 40-50% equity fund, 60-70% equity fund and 80-90% equity fund, with the remainder exposed to bonds. The equity portfolios are typically invested in securities of large and medium-sized companies, leveraging Wellington’s deep research capabilities to identify investments that meet the funds’ sustainability criteria on a case-by-case basis. Portfolio managers Nataliya Kofman (equities) and Loren Moran (fixed income) engage with company management teams where they believe it will be meaningful to the long-term performance of a company and therefore likely to impact investment returns. They apply this philosophy across both the equity and fixed income portfolios and take a multi-dimensional approach to incorporating ESG considerations. Their portfolio management teams work closely with Wellington's dedicated ESG analysts, as well as its credit and equity analysts, on ESG considerations. Its ESG analysts provide a quantitative rating on more than 8,500 companies on E, S and G factors, as well as providing an additional fundamental rating for many of these, which often reflects the differing views held on a company. By analysing the ESG ratings distribution within the portfolio and across the scores of individual names, Nataliya and Loren are able to identify companies that warrant further ESG research to determine the possible impact on an investment thesis and whether they are being compensated for the ESG risks. They believe that an extended investment horizon combined with ongoing company engagement is part of their edge and that ESG considerations can be beneficial over extended holding periods, either through risk mitigation or value creation. For the companies they invest in, they value both leadership with regards to ESG factors, and evidence of tangible improvement where ESG considerations are not best in class. Nataliya and Loren lean into fundamental ESG research to identify those companies that exhibit genuine commitment and engagement with ESG principles. Company engagement: Nataliya Kofman and Loren Moran Nataliya and Loren believe that engagement with portfolio companies provides the best opportunity for long-term investors to understand the ESG considerations that impact the industries and regions where they invest. In their view, this creates the greatest impact in terms of improving corporate behaviour, and therefore investment returns, over time. Given that Wellington have long been integrating ESG considerations into its investment processes, Nataliya and Loren have excellent access to management teams for both the equity and fixed income holdings. Both portfolio management teams also regularly attend engagement meetings alongside ESG analysts, credit analysts and equity analysts. These multi-disciplined interactions provide a balanced perspective on sustainability issues, offer an opportunity to raise specific ESG discussion points and serve to challenge assumptions about a company's management team and board structure. The ESG considerations that are important to Nataliya and Loren include: environmental practices and the impact they have on energy transition and operational risks; social practices and the impact they have on advancing diversity and inclusion as to how companies operate, as well as the effect businesses have on local communities; and governance and the impact it has on capital allocation. They evaluate environmental practices given that opportunities are created by energy transition, and because poor environmental risk management practices can lead to substantial financial and reputational risk. They are focused on social aspects of diversity and inclusion because they believe that diverse boards and organisations lead to stronger corporate culture, better talent retention and positive reputational benefits in local communities. Nataliya and Loren evaluate corporate governance through the lens of capital allocation and are focused on board oversight, because good management decisions on capital allocation are influenced by challenge and incentives. At the overall portfolio level, Nataliya and Loren conduct dedicated ESG reviews to specifically discuss ESG considerations and to ensure the integrity of their ESG integration process. General Motors, for example, is considered by Wellington to be an investment with improving capital allocation as a result of better governance. It is emerging as an industry leader in reducing carbon emissions through the introduction of electric vehicles. It is looking to improve the carbon footprint of its own operations, and while the company has faced some shortcomings regarding its labour management practices, remedial actions have been implemented with the involvement of the board and CEO. There have also been notable improvements in the quality of the board through the appointment of directors with backgrounds in technology, cybersecurity and advanced engineering. It also has a strong and growing representation of women in leadership positions including a female CEO with women comprising 32% of top management. Engagement: an intrinsic component of research and decision making At Vanguard, we believe that Wellington’s ongoing direct access to company management is highly valuable given the number of meetings conducted, the breadth of contacts, and the quality of discourse. In general, Wellington prefers to engage privately with investee companies, as it has found that this encourages openness and a constructive and lasting dialogue. By partnering with Wellington, which already has a long history of actively engaging with the companies it invests in, we believe that our new SustainableLife active funds range can deliver long-term, sustainable value to investors.
Sarah Gibb-Cohen Senior investment product specialist, Vanguard Europe
Investment risk information The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall. Investments in smaller companies may be more volatile than investments in well-established blue chip companies. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds. The Funds may use derivatives in order to reduce risk or cost and/or generate extra income or growth. The use of derivatives could increase or reduce exposure to underlying assets and result in greater fluctuations of the Fund's net asset value. A derivative is a financial contract whose value is based on the value of a financial asset (such as a share, bond, or currency) or a market index. Some funds invest in securities which are denominated in different currencies. Movements in currency exchange rates can affect the return of investments. For further information on risks please see the “Risk Factors” section of the prospectus on our website at https://global.vanguard.com. Important information This is a marketing communication. This document is directed at professional investors and should not be distributed to, or relied upon by retail investors. For further information on the fund's investment policies and risks, please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions. The KIID for this fund is available, alongside the prospectus via Vanguard’s website https://global.vanguard.com/ This document is designed for use by, and is directed only at persons resident in the UK. The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of shares and /or units of, and the receipt of distribution from any investment. The Authorised Corporate Director for Vanguard Investments Funds ICVC is Vanguard Investments UK, Limited. Vanguard Asset Management, Limited is a distributor of Vanguard Investments Funds ICVC. For investors in UK domiciled funds, a summary of investor rights can be obtained via https://global.vanguard.com/portal/site/portal/ucits-investing-with-us and is available in English. Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. © 2022 Vanguard Asset Management Limited. All rights reserved.
A multi-dimensional approach to incorporating ESG and sustainability
ESG risk avoidance The fund managers implement a set of clear exclusions.
Sustainable principles
Engagement with portfolio companies The fund managers engage with company management on ESG matters and promote net zero targets.
Net zero commitment The managers have set a 2050 net zero target aligned to the Paris Agreement.
Good governance assessment The companies in which the fund invests must follow good governance practices as a precondition for investment.
Find out more