a fundamental reshaping of finance
can esg really be passive?
Recent years have seen a rapid rise in both ESG and passive investing, but can the two ever be compatible?
The fact that we’re in the midst of a terrible pandemic doesn’t change the facts: climate crisis is just as real. The investment community is seeing a fundamental shift in ideas of what constitutes a ‘good’ investment, and the range of people, creatures, soils and oceans that might be affected. But many questions remain unresolved. Does ESG risk becoming commoditised, and how can we guard against that? Can the various definitions and terminologies around it ever be clarified to create a coherent set of standards? And, now the crash has finally arrived, will ethical investing be lower on the list of priorities?
investment specialists on the next generation of esg investors
We spoke to several investment experts and asked them for their views on all things ESG.
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Q&A with Francois Millet, Head of Strategy, ESG and Innovation
Credit - the final ESG frontier
Understanding risk is fundamental to credit analysis- so why are index providers lagging?
A fundamental reshaping of finance
Impact investing
Can ESG really be passive?
ESG indices: how accurate are they?
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BACK TO THE TOP
ranking the ‘g’ in esg
Do governance factors hold more weight over their environmental and social counterparts for returns?
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what makes a ‘good’ investment?
Impact investing is considered the summit of ESG approaches. We define what it involves and assess its effectiveness
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BlackRock CEO Larry Fink calls for a transformation of finance to align with sustainability, but just how realistic is it?
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esg indices: how accurate are they?
ESG indices have long been shrouded in scrutiny. We investigate whether they can be seen as truly accurate and trustworthy.
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can esg survive a post-coronavirus dip?
ESG investing has flourished in a booming economy, but how will it cope in a downturn?
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A truly global sustainable fund
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Why divestment must be the ultimate ESG sanction
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Towards a more inclusive capitalism
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Climate protection implemented in practice
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More ESG questions than answers
Climate investing: Think positively
By Dylan Lobo
Can ESG survive coronavirus?
Ranking the 'G' in ESG
NEXT STORY
PREVIOUS STORY
We are on the cusp of a significant reallocation of capital as investors incorporate the impact of sustainability on investment returns. That is according to the chairman and CEO of the world’s largest asset manager. In his annual letter to company bosses, BlackRock’s Larry Fink said climate change had become a defining factor in companies’ long-term prospects. ‘Awareness is rapidly changing and I believe we are on the edge of a fundamental reshaping of finance,’ he said. The message comes as little surprise to companies like Thomas and Thomas Financial Services, an early proponent of socially responsible investing. Several years ago, Darren Lloyd Thomas, managing director of the southwest Wales firm, argued with those who said ethical and responsible investing was a fad. ‘I said “this time it is different”,’ he said. ‘The world is now a much smaller place because of communication and reporting. This makes it far harder for investors to bury their head in the sand and not see that profits can be made either at the expense of the planet or in harmony with it.’ He points to the performance of his purely ethical portfolios over the past five years as proof that it is ‘very possible to have your cake and eat it’ – investing for environmental and social benefits as well as profits. While considerations around governance have always been relatively important for investors, recognition of environmental and social factors and their impact on financial performance is growing. Successful integration of environmental, social and governance (ESG) factors is increasingly associated with quality companies that offer greater downside protection and yield better long-term returns.
Progress and pitfalls Governments and regulators are also driving change. Legislative changes in the UK that promote sustainability include the phasing out of coal and wet wood for home fuelling between 2021 and 2023, and bringing forward a ban on petrol and diesel cars from 2040 to 2035. ‘Regulators are also strongly committed to seeing climate change recognised as a real risk to financial markets. The Bank of England has played a particularly strong leadership role here,’ said John Ditchfield, head of responsible investment at London-based Helm Godfrey and co-founder of Impact Lens, which was launched at the start of last year to evaluate funds’ ESG credentials.
WHAT DO YOU THINK OF LARRY FINK’S LETTER?
Chris Welsford, managing director, Ayres Punchard Investment Management ‘Larry Fink has built a very successful business by ignoring reality and creating a profit illusion-based on investment in industries that have so far not had to account for the true costs of their production. Having made massive profits at the expense of the planet and threatening the existence of humanity, he realises the game is up – there will be a bill to pay for his investment in fossil fuel industries and large-scale polluters. So, he must change!’
Patrick Thomas, head of ESG investing, Canaccord Genuity Wealth Management ‘Finance is certainly being reshaped. Climate transition and economic growth working for a greater number of people are two structural megatrends that will drive markets over the coming decades. This is less about finance developing a moral conscience and more about the public sector providing a pretty detailed investment framework with the private sector providing the capital. Investors will either be on the right side of this or they won’t.’
Matt Coppin, paraplanner, Helm Godfrey ‘There is a reshaping of society and greater demand for more responsible behaviours, whether environmentally or socially. It isn’t just a fad – people are truly concerned about the climate emergency and want to do something about it. If there wasn’t a reshaping of finance, there would be a serious issue in terms of returns going forwards. The companies that are “futureproofed” and will grow in the future are responsibly focused.’
While considerations around governance have always been relatively important for investors, recognition of environmental and social factors and their impact on financial performance is growing. Successful integration of environmental, social and governance (ESG) factors is increasingly associated with quality companies that offer greater downside protection and yield better long-term returns.
As a result, companies are under growing pressure to improve their sustainability-related disclosures. For investors, regulators, insurers and the general public to understand how companies are managing sustainability issues, Fink believes disclosure should ‘extend beyond climate to questions around how each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain or how well it protects customers’ data’.
Awareness is rapidly changing and I believe we are on the edge of a fundamental reshaping of finance
Regulators accept that ESG factors are financially material – and should be integrated into the advice process. Mifid III is expected to include a clear requirement to assess a client’s concerns around ethical and social factors, Ditchfield said. Some back-office system providers like Intelligent Office already include a question about social, ethical and environmental considerations on their fact finds. While progress is clear, sustainable investing remains a relatively fragmented area, with industry definitions and approaches varying enormously. ‘There has been quite a lot of evolution in this space already – plenty of products doing plenty of things,’ said Patrick Thomas, head of ESG investing at Canaccord Genuity Wealth Management. ‘Labelling and standardisation are an issue though, and something that regulators need to address.’
PREV STORY
Larry Fink, CEO BlackRock
Neville White, Head of Responsible Investment Policy and Research at EdenTree Investment Management
What role should divestment play as part of a responsible investment strategy? Extensive recent dialogue with our clients has shown investors clearly want fund managers to set ethical investment red lines and that whilst they favour engagement, this must be backed-up with the ultimate sanction of divestment. Our ‘Profits with Principles’ approach at EdenTree certainly endorses the positive allocation of capital to companies that are at the forefront of sustainable transition. However, we believe that this should not be at the expense of ensuring ethical and responsible behaviours.
Case for divestment There is a growing voice among asset managers that argues by avoiding unethical companies, we leave ownership and therefore governance to investors uninhibited by ethical considerations, thereby strongly promoting continued investment. Yet in modelling, building and managing portfolios, fund managers make choices every day on stocks they hold and divest from on financial grounds. It seems strange then that divestment on ESG grounds has become so contentious. Our imperative is to deliver long-term out performance by investing in superior companies that have a compelling investment and ESG case. Whilst sustainability is important – and we look for thematic plays that support our key strengths in education, health & wellbeing, social infrastructure and sustainable solutions - we always seek to ensure that these are also strong candidates in terms of business ethics, corporate governance, human rights and environmental management. Choosing not to allocate capital to companies exhibiting poor overall environmental, human rights and business ethics credentials is a perfectly valid risk-adjusted approach to ESG analysis and oversight. In what circumstances then would divestment support an ESG investment strategy? We apply the sanction to companies consistently failing to make progress in improving their performance in key areas such as climate change, or which have particularly poor records in fines, prosecutions, higher than average health & safety accident rates or pollution incidents. These factors reduce a company’s ability to achieve superior long-term performance, thus potentially justifying divestment. For example, we recently divested from Deutsche Bank, which has been implicated in multiple financial scandals. Due to poor internal controls, the company saw ballooning contingent liabilities and has been weighed down by prosecutions. However, our concerns centred around operational integrity, and where culture became severely challenged by the ongoing failure to restore trust. Finally, a severe misconduct crisis, which included LIBOR rigging, mis-selling and money laundering – with serious implications for the long-term prospects of the company – prompted our decision to divest. We also withdrew our investments in British multinational security services company G4S. The company was facing multiple ethical challenges over care and protection, including assault, use of non-approved restraint and more serious torture allegations in South Africa. Operating in a high-risk environment, there was mounting evidence G4S was failing to provide adequate care and custody. Our decision to divest was ultimately prompted by allegations of abuse at the Medway young offender unit.
A multi-layered approach We certainly endorse engagement, but there is the perceived danger among industry observers that the responsible investment industry has turned engagement – and the pursuit of it for its own sake – into an excuse not to take more decisive action when needed. The fossil fuel divestment campaign which emerged in 2010 has also had a growing influence, backed by studies suggesting client portfolios may incur significant ‘stranded asset risk’, given the world needs to transition to a low-carbon economy, by keeping unexploited fossil fuel assets in the ground. This has built a powerful case on moral and financial grounds for avoiding or indeed divesting from fossil fuels in order to align portfolios more closely to the Paris Agreement target – keeping the increase in global temperatures to below 2OC and limiting the increase to 1.5OC. EdenTree’s Amity Funds have taken an increasingly focused approach to being ‘carbon aware’ by avoiding thermal coal, oil & gas exploration and production and some high emitting industries and companies that are unlikely to transition. At EdenTree we invest for the long-term. We do not take the decision to divest lightly and always look constructively to engage with a company first, often over long periods of time. However, these efforts are not always rewarded and from that we may sometimes conclude that divestment is warranted. Since 2012, we have proactively divested from 10 stocks and fixed interest instruments specifically on ethical or ESG grounds. These range from systemic business ethics failures (corruption, money laundering etc.) to product quality and safety issues, incompatibility with our climate change stance, to pressing human rights and safeguarding concerns. We believe the balance between good stock selection and constructive engagement, but with the ultimate sanction of divestment, provides a robust process of risk assessment for clients. It also provides the reassurance that we have clearly established values with divestment red lines. Timely divestment can also protect client capital from growing legal and regulatory headwinds. Many of the stocks we divested from on ethical and ESG grounds still face systemic challenges including fraud related litigation and product safety. Some financial institutions are still recovering from headwinds sustained during the financial crisis a decade ago. Understanding these sometimes long-term impacts via our robust ESG due diligence process and acting on them, has, we believe, protected clients from reputational impacts and capital loss. For example, Samsung Electronics has been mired in controversy regarding corruption and poor employee engagement for some time, and we had strong concerns over cobalt sourcing and the integrity of human rights within the supply chain. Governance remained a real problem, coupled with a culture of impunity given rising safety challenges. After engaging with Samsung following the arrest and conviction of senior management for corruption, the company’s lack of reassurance left us no choice but to divest.At a time when financial services are suffering from high levels of mistrust, investment managers are under pressure to demonstrate active principles alongside wider ESG credentials. We believe divestment, deployed wisely, sits comfortably within a balanced strategy of focused engagement and research. Withdrawing client capital or taking profit from disreputable businesses provides ultimate reassurance of the overall process, and one we know is supported by clients who seek strong values-led action from their managers.
The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. If you are unsure which investment is most suited to you, the advice of a qualified financial adviser should be sought. EdenTree Investment Management Limited (EdenTree) Reg. No. 2519319. Registered in England at Beaufort House, Brunswick Road, Gloucester, GL1 1JZ, United Kingdom. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.
IMPORTANT INFORMATIONS
What makes a ‘good’ investment?
In February, the London-based IFA Wren Sterling announced that it will assess clients’ impact-investing appetite as a standard part of its new client assessment and existing client review process. It’s a move that looks to address the seeming disconnect between investment interest and investment action. More than half (56%) of the UK population want to move in to impact investing, but only 9% have done so. This is according to government research on why the country is failing to fulfil its potential as a force for financial good. Impact investing is a subset of the responsible investment stable, but it is a discipline of its own that aims to proactively change social and environmental behaviour through investment. The Global Impact Investors Network (GIIN) defines impact investing as ‘investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return’. UK regulation is driving impact investing up the agenda, and more institutions are expected to at least have a formal policy on this area. Problems may arise with reassuring investors that impact investing can enhance, rather than sacrifice, returns but advisers can look to the GIIN’s 2019 Impact Investor survey for support. The survey found that ‘portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole’. Advisers are faced with a huge range of perspectives on responsible investment that will inform their level of inclusion and expectation in this sector. Incorporating responsible investing into a portfolio will take many forms and may range from screening out particular industries or sectors for ethical reasons to engaging with companies to drive positive behaviour and investing in readymade strategies.
The adviser view: Creating long term value When we look for new funds to add to our preferred list, we are now focusing more, but not exclusively, on funds with ESG approaches. We include ethical or ESG funds within our mainstream client portfolios to provide diversification and to provide crucial exposure to interesting and promising investment themes. For instance, we have been particularly positive on the Impax Environmental Markets Investment Trust for several years. That fund provides access to renewable energy and water efficiency, which are areas with increased global demand. We feel these types of holdings are some of the best-placed investments to benefit from new technologies and the essential transition to a healthy, low carbon and sustainable economy. The ESG funds that produce the best returns within our portfolios are Impax Environmental Market Investment Trust, Royal London Sustainable World Trust, BMO Responsible Global Equity, Sarasin Food and Agricultural Opportunities, and Baillie Gifford Positive Change.
Andy Willemite, Financial Planner at Heron House, includes ethical portfolios throughout his strategies
The manager view: Opportunities from the energy transition The energy transition is happening, and we want companies to be a part of it. Our Climate Impact Pledge, an important component of the Future World Fund, is a commitment to engage with large companies and sectors that are pivotal to the low carbon transition. Part of our selection process for the fund involves ranking companies according to how they are addressing the transition. If we decide a company is not meeting a minimum standard, we will divest from that position. But this doesn’t mean we neglect performance. It’s absolutely important to make sure the returns are there, because we’re talking about people’s pension funds. We created an index that takes into account four financial factors and three environmental metrics. The carbon ‘tilt’ has not so far contributed to a loss of performance; if anything, the evidence points in the opposite direction.
Meryam Omi, Head of Sustainability and Responsible Investment Strategy at LGIM, on how the group’s Future World Fund is looking to a low carbon future
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1. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/659079/Executive_Summary__ Growing_a_Culture_of_Social_Impact_Investing_in_the_UK.pdf 2. Approximately 15% of respondents indicated meeting or exceeding both their impact and financial performance expectations, and just 2% and 9% of respondents, respectively, reported underperforming relative to their impact and financial performance expectations. https://thegiin.org/assets/GIIN_2019%20Annual%20Impact%20Investor%20Survey_webfile.pdf
Impact investing… aims to proactively change behaviour through investment
Performance relative to expectations
Number of respondents shown above each bar; some respondents chose ‘not sure’ and are not included.
LGIM throws its weight behind a multiple stakeholder view of potential investment decisions
What do you mean by inclusive capitalism? For us, every strategy and investment decision must now involve a much broader stakeholder base. Capitalism as we knew it in the past has had too narrow a focus: it can no longer be rooted purely in the idea of shareholder value. We advocate evaluation of the externalities and wider context- by this we mean the impact of our actions on people and the environment.
How do you approach responsible investing at LGIM? In the past, fundamental research into a company would focus on its balance sheet and strategy, assessing how this would translate into earnings per share and financial return. We now integrate the externalities of a company’s strategy into our investment decision. For example, greenhouse gas emissions were never part of fundamental analysis, but this now has to be part and parcel of investment processes. We understand that our capital allocation decisions will have an impact that go well beyond the shareholder value-based concept.
How do you incorporate the stakeholder-based model in your processes? LGIM’s stewardship team was founded in 1972, so the idea that there is a responsibility for asset managers to effect positive outcomes has always been embedded in our investment philosophy. What we are doing now is producing an end to end process, so that the stewardship team is more fully integrated. It’s based on a belief that the wider, stakeholder-based factors are financially material, which in turn dictates that it’s necessary to broaden the way companies are analysed.
Are environmental, social and corporate governance factors really financially material – and if so, why? The ‘G’ part of ESG has always been a part of fundamental analysis, so it’s the ‘E’ and the ‘S’ that will become increasingly material because pricing discovery mechanisms in markets have so far not fully captured these factors, simply because there was no effective means of quantifying them until now. But as attention from policymakers and regulators forces change in reporting requirements, there may be a much higher correlation between ESG factors and market pricing.
Do ESG approaches differ across the different strategies you run? While our core philosophy remains consistent, implementation differs between index strategies- which are by definition composed of backward-looking data- and active approaches, which can factor in future changes. Implementation is also different in public and private assets, because in the latter we are direct owners of the assets and that requires a different approach to stewardship.
What are the potential benefits to clients of responsible investing? If clients agree with us that the stakeholder model may be the right one, and that there is genuine financial materiality to ESG factors, then clearly an approach that incorporates both of those could lead to a better financial return. At the moment, for a lot of clients, ESG is seen more as risk mitigation- our aim is to demonstrate to them that it is also about uncovering opportunities. Take a company like *Norway’s Equinor, for example: it already has massive exposure to wind power, but in our view is also very well placed to add to that, and also to add hydro-electric power. We believe this could prove to be an appealing opportunity. On this key issue of the energy transition, as part of a strategic partnership with Baringa Partners – the consultancy – I should add that we plan on offering our clients potential end-to-end climate solutions. These will be aimed at measuring and managing carbon exposure; identifying and mitigating underlying climate risks; and seeking temperature alignment.
How do you embed principles of responsible investing across decisions and processes? Across both public and private assets, we have established a fully integrated framework for responsible investing to strengthen long-term returns and raise market standards In terms of the public, outward-looking side, our investment stewardship team, who are independent from the investment team, will raise concerns and vote at company AGMs. Inwardly, we have changed our global research and engagement platform, with six global sector teams that are capital structure-agnostic and which aim to understand best in class ESG practices. The aim is to unify our engagement efforts; determine the exposure of sectors and companies to ESG risks and opportunities; and, ultimately, deliver integrated solutions for clients.
Under what circumstances would you divest from a company that doesn’t meet ESG standards? Is divestment an effective tool to implement change? As an example, we have established a ‘climate impact pledge’ – a targeted engagement process with about 80 largest companies in the sectors most linked to greenhouse gas emissions. When companies fail to meet our minimum requirements, to take steps to hasten the transition to a low-carbon world, after a period of engagement, we ‘name and shame’ them – and divest from them within Future World fund range. But we also say that companies can come back and re-engage on the issues we have raised; we’ve already had success with that approach, and have reinstated companies to our funds. So clearly the approach can work. More broadly, within the investment team, we have clear process around any decisions for or against divesting. We have initiated a project called ‘smart exclusions, under which we assess the financial materiality of ESG risks and the timeframes over which they may play out. In doings so we put the interests of clients – both in seeking to safeguard their capital against downside while also capturing upside – at the forefront of any decisions to exclude.
Past performance is not a guide to future performance. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Views expressed are of Legal & General Investment Management Limited as at [insert date] 2020. * For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security. This document is designed for the use of professional investors and their advisers. No responsibility can be accepted by Legal & General Investment Management Limited or contributors as a result of information contained in this publication. The information contained in this brochure is not intended to be, nor should be construed as investment advice nor deemed suitable to meet the needs of the investor. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be solely relied on in making an investment or other decision. The views expressed here are not necessarily those of Legal & General Investment Management Limited and Legal & General Investment Management Limited may or may not have acted upon them. This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation. No party shall have any right of action against Legal & General in relation to the accuracy or completeness of the Information, or any other written or oral information made available in connection with this publication. As required under applicable laws Legal & General will record all telephone and electronic communications and conversations with you that result or may result in the undertaking of transactions in financial instruments on your behalf. Such records will be kept for a period of five years (or up to seven years upon request from the Financial Conduct Authority (or such successor from time to time) and will be provided to you upon request. © 2020 Legal & General Investment Management Limited. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, without the written permission of the publishers. Legal & General Investment Management Limited. Registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119272.
IMPORTANT INFORMATION
In 2015, Volkswagen sat near the top of the ESG index charts. The German carmaker was held up as a paragon of progressive governance, lauded for the steps it had taken to stay ahead of the industry. That same year, Volkswagen admitted to falsifying its emissions tests, creating special software to dupe US regulators in one of the biggest automotive scandals of all time.
For many commentators, this debacle still casts a pall over ESG’s credibility. In their eyes, it shows that ESG indices are fundamentally unsound and that you can’t gauge ethical credentials by simply scanning corporate filings. But now the index providers are striving to change this impression. They’re moving beyond negative screening towards a more nuanced approach, in the hope of demonstrating that ESG doesn't require an active manager — and that a passive approach to sustainability is not simply an oxymoron.
‘Backward-looking’ Against these benefits, one of the perennial concerns around passive ESG is the lack of control it provides. To really gauge a company’s ethical credentials, cynics suggest, investors have to dig deep and analyse them forensically, rather than relying on a cursory filings check. However, index managers are working hard to change that reputation. For example, industry giant MSCI now employs 185+ dedicated ESG analysts, rates over 6,500 companies and operates in excess of 1,000 equity and fixed income ESG indices. This huge recruitment drive means MSCI and competitors such as FTSE Russell can go way beyond the old negative-screening tickboxes. They can provide specific metrics for each industry, selecting issues relevant to that particular space, and pull in data from agencies as diverse as the International Labour Organisation and the World Wildlife fund.
Competition As global awareness of climate change increases, more companies are revealing their ‘ethical’ data. To take just one example, the number of companies reporting greenhouse gas data to the Carbon Disclosure Project (CDP) has soared from 300 in 2004 to about 8446 today. Maria Egan, vice-president at Reynders McVeigh Capital Management, said: ‘Previously, you had to call a company and really root around to see their true footprint. We’ve come a long way since then in terms of the data available.’ But to maximise all of this information, the providers need to improve their core methodologies. And the industry leaders are certainly channelling vast amounts of time and money into this objective. MSCI, for example, has acquired a string of smaller agencies and has just rolled out a new scoring system, which embraces nuanced metrics such as corruption exposure, data security and sustainable water practices.
Work to do However, Chau admits that there are still hurdles to overcome. ESG index providers ‘need to find some consensus on what and how to report’, and much still hinges on how much companies are willing to reveal. Then there’s the enduring lack of consistency. There are over 100 ESG data providers, and most employ proprietary methodologies. In a study sampling five rating agencies, published last August, researchers from MIT found an average correlation of just 0.61% -- while the major credit rating companies achieve 0.99%. Alex Bibani, fund manager at Sarasin Investment, said: ‘No one’s values correlate. This is the massive problem with all of ESG really, especially passive. There’s almost zero correlation between one data provider and another.’ This continues to cause high-profile anomalies, such as Tesla, which has been ranked highly by MSCI but hammered by FTSE Russell. What’s more, it allows certain stocks to fall through the gaps. As Reynders McVeigh Capital Management’s Egan points out, many bank stocks score highly for their environmental credentials because they use little land and water, even though they fall well short on transparency. There are even suspicions of ‘greenwashing’, whereby providers deliberately falsify or obfuscate their stocks’ sustainability. In 2018, Friends of the Earth criticised Dow Jones for including a Singaporean palm oil company in its ethical Asia Pacific index. Last November, wealth manager SCM Direct reported that several funds marketed for their ESG credentials held clear stakes in the alcohol, gambling and tobacco sectors. So the picture is far from perfect. But as the corporate world faces ever-increasing pressure to reveal its ESG data, the accuracy of indices is likely to keep improving. In reality, they don’t really have much choice.
If a company does not disclose information that we consider relevant, we penalise them for non-disclosure by giving them a poor score on that particular indicator.
It’s a similar story at FTSE Russell, whose ESG ratings are now based on 14 different themes and 300 data points. Fong Yee Chan, senior product manager for sustainable investment, said Russell has also moved away from old-fashioned guesswork in the event of non-disclosure.‘When assessing a company, we look at what sub-sector they operate in,’ she said. ‘That gives us an indication of relevance. If a company is deemed highly relevant for a theme like climate change, our expectation is that they should be disclosing all relevant information on climate change. ‘If a company does not disclose information that we consider relevant, we penalise them for non-disclosure by giving them a poor score on that particular indicator.’ This new, tougher approach is abetted by advances in quantitative analysis (or quants), which uses mathematical modelling and can harness technologies such as machine learning. One company at the forefront of this trend is Act Analytics, whose ESG lead Elgin Chau explains that his firm only uses data that’s available and ‘eliminates much of the inherent bias’ by comparing companies against their peers. ‘That way you can isolate the disclosure gaps that are actually meaningful,’ Chau said. ‘If an entire sector chooses not to report on a specific metric, perhaps it isn’t relevant. However, if you’re the only one withholding a specific metric, that might have some meaning.’
growth in disclosing companies since 2004
Competition As global awareness of climate change increases, more companies are revealing their ‘ethical’ data. To take just one example, the number of companies reporting greenhouse gas data to the Carbon Disclosure Project (CDP) has soared from 300 in 2004 to about 7,000 today. Maria Egan, vice-president at Reynders McVeigh Capital Management, said: ‘Previously, you had to call a company and really root around to see their true footprint. We’ve come a long way since then in terms of the data available.’ But to maximise all of this information, the providers need to improve their core methodologies. And the industry leaders are certainly channelling vast amounts of time and money into this objective. MSCI, for example, has acquired a string of smaller agencies and has just rolled out a new scoring system, which embraces nuanced metrics such as corruption exposure, data security and sustainable water practices.
Why a green bond ETF could be a perfect strategy to support the race to reduce carbon emissions
You launched the first green bond ETF in February 2017. How has the market developed since then? Our universe of investment-grade, US dollar- and euro-denominated green bonds over 300 million has seen rapid growth. When we launched three years ago, there were only about 70 such bonds in the index, whereas today the number is around 350. Primary issuance of green bonds in 2019 was $260bn, which is more than 50% growth on 2018. Today there is more than $700bn in outstanding labelled issuance and the indications are that we will soon reach $1tn. We’re happy that our fund, Lyxor Green Bond UCITS ETF, has grown along with the market. It launched with around $18m, stayed relatively flat in terms of assets for around 18 months before taking off at the beginning of last year. Assets under management now stand at close to €300m.
Why has there been such a rapid expansion in the green bonds market? It’s clear that a massive amount of capital will be needed to finance the huge transition that must be made if we are to meet the Paris Agreement goals. The Intergovernmental Panel on Climate Change itself has said that the world needs to spend $2.4tn every year if we are to be net-zero in CO emissions by 2050. All areas of capital markets will need to be employed, and within that, green bonds are a very focused and innovative tool.
Within ESG investing as a whole, there’s a real lack of clarity around definitions. Does that apply to green bonds? Green bonds are one of the few areas of ESG investing where there is relatively little discrepancy around definitions. It’s one of the most standardised compartment within the entire ESG space. We focus on ‘labelled’ green bonds, which are bonds qualifying under the standards set by the Climate Bonds Initiative (CBI), which are themselves aligned with the Green Bond Principles and more. The standards require that the bond’s proceeds must be used for denominated projects that are eligible according to CBI’s very detailed taxonomy, which appeared to form an input for the EU’s forthcoming taxonomy, a pillar of the EU’s sustainable finance action plan. The fact that labelled green bonds are defined by the use of their proceeds, which are verified by third parties, and that the fund received a label and is audited annually, means investors can be certain that they are focused on climate change-aligned categories and goals.
What are the main categories for green bond issuers? The three largest are renewable energy, low carbon buildings and low carbon transport. Others include land use, water, waste and the circular economy, and the newest category: adaptation and resilience, which focuses on mitigating the effects of climate change that are already happening, eg, flooding, hurricane damage and so forth.
There’s obviously no shortage of ESG products on the market. Why should investors consider green bonds? The fact that we have very defined taxonomies in the green bonds market means we have fewer competing standards and indices, and greater clarity of definition. Furthermore, although the market has seen rapid growth, in the past few months we have seen central banks starting to invest. The European Central Bank, for example, might accelerate green bonds purchases in its quantitative easing program. We have also seen sovereign issuers coming to the market – last May, the Dutch government launched a €6bn allocation*. So it could be argued that the market is just beginning to come of age.
Why should investors take a passive approach to green bond investing? Building climate-aligned portfolios is very data-intensive. Tracking the decarbonisation pathways the companies in your portfolio are committing to requires an enormous data-set. It’s probably the most data-heavy area of asset management now. In the same way selecting green bonds and tracking their use of proceeds in a transparent and disciplined way suits well with an index approach. Our view is that the aim of investing in green bonds is not to add alpha in the sense of beating an index. The main objective is to build a green bond portfolio whose instruments are thoroughly checked for eligibility and in line with the taxonomies of eligibility. Beyond that, the investment case is that we are in a long-term, low-interest rate environment and green bonds are inherently a long-duration asset class. Financing infrastructure projects, for example, is naturally a long-term commitment. Longer duration means some yield pick-up but that’s also why thanks to decreasing global rates the one-year return on our ETF is 10.7%, while year-to-date it is 3.7%.
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This communication is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2014/65/EU. These products comply with the UCITS Directive (2009/65/ EC). Société Générale and Lyxor International Asset Management (LIAM) recommend that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on www.lyxoretf.com, and upon request to client-services-etf@lyxor.com. Except for the United-Kingdom, where this communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658, this communication is issued by Lyxor International Asset Management (LIAM), a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2014/91/EU) and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority).
Find out why you can trust in the ‘greenness’ of Lyxor’s Green Bond ETFs
Source for all data: Lyxor International Asset Management, Climate Bonds Initiative, as at 31/12/2019. Performance as at 28/02/2020, past performance is not a reliable indicator of future results.
*Source: Dutch State Treasury Agency, Ministry of Finance https://english.dsta.nl/subjects/g/green-bonds
The twin desires of passive investing and sustainability integration are fundamentally at odds. ESG can’t be passive as it will deviate the investment performance at the end
We’re in discussions to get a low-cost proposition out for younger investors, who are starting at what the industry would consider to be low volumes of money. Passive is perfect for that, because [the end investors] have minimal costs but collectively their total contribution towards sustainable investing will be huge.’ At the same time, passive offers the potential of a lower risk profile. The ‘buy-and-hold’ stance which is essential to passive investing, coupled with the diversified approach most providers take when building indexes, is extremely enticing for conscious investors who prioritise reliable performance over major gains.
Annual European Sustainable Fund Flows, 2010–19 (EUR Billion)
It is only 15 years since the term ‘ESG’ (environmental, social and governance) was first coined in a UN study entitled Who Cares Wins. But, today, it is hard to think of a world without this form of investment. In 2017, ethical, social and governance portfolios reached a valuation of $23tn (£17.5tn), around a quarter of all professionally managed investments on the planet (some believe the figure is actually closer to a third). What is particularly striking about the boom is the way the sector itself is changing shape. ESG was initially dominated by a core of highly specialised active fund managers, but now investors are flocking towards exchange-traded alternatives. According to Lyxor, passive ESG investing is currently growing at three times its counterpart. Last year alone, inflows increased by 45%. This growth is partly down to the basic cost benefits passives provide. A typical fund tracking the FTSE 100 will only cost around 0.1%, while the average fee for actively managed equity funds is 0.9%. As a larger number of smaller, less experienced investors enter the ESG race, this kind of differential can be extremely attractive, as Duncan Farrar, an adviser with Manchester-based Parsonage, explains. We’re in discussions to get a low-cost proposition out for younger investors, who are starting at what the industry would consider to be low volumes of money. Passive is perfect for that, because [the end investors] have minimal costs but collectively their total contribution towards sustainable investing will be huge.’ At the same time, passive offers the potential of a lower risk profile. The ‘buy-and-hold’ stance which is essential to passive investing, coupled with the diversified approach most providers take when building indexes, is extremely enticing for conscious investors who prioritise reliable performance over major gains.
Increasing sophistication Against these benefits, one of the perennial concerns around passive ESG is the lack of control it provides. To really gauge a company’s ethical credentials, cynics suggest, investors have to dig deep and analyse them forensically, rather than relying on a cursory filings check. However, index managers are working hard to change that reputation. For example, industry giant MSCI now employs 185+ dedicated ESG analysts, rates over 6,500 companies and operates in excess of 1,000 equity and fixed income ESG indices. This huge recruitment drive means MSCI and competitors such as FTSE Russell can go way beyond the old negative-screening tickboxes. They can provide specific metrics for each industry, selecting issues relevant to that particular space, and pull in data from agencies as diverse as the International Labour Organisation and the World Wildlife fund.
‘One or the other, but not both’ Of course, this is not enough for many seasoned investors, who believe that passive ESG will always be a contradiction in terms. As Stéphane Soami Mabiala, ESG specialist at South African consultancy EBS Advisory puts it, ‘the twin desires of passive investing and sustainability integration are fundamentally at odds. ESG can’t be passive as it will deviate the investment performance at the end. ‘In other words, investors can have one or the other, but not both.’ This view is echoed by Alex Bibani, a fund manager at Sarasin, who says the lack of universal standards governing ESG indexes is a major problem. Not only does each index provider carry its own unique metrics, each metric has very different implications from one company to the next. ‘If you look at the typical index provider, they will list dozens of key issues, split across ESG,’ Bibani said. ‘The problem is that the companies in each sub-sector are not identical – they very rarely have the same risks, so what is material for one company is not material for another, so they don’t report it. ‘At the sub-sector level they’re almost trying to create a one-size-fits-all jacket, which while useful to highlight certain risks, does have its shortcomings. We use the data ourselves, but we often find that, once we have done our own work, our view differs from the index provider.’
‘‘If you can tolerate the risk, fine’ Ultimately, it comes down to the individual investor. Just how ethical do they want their investments to be? As Duncan Farrar said: ‘You need to decide whether you can accept the risk that passive creates. It isn’t perfect — it won’t react straight away if a company ceases to fit the brief, for example. ‘If you can tolerate that, fine, but if you are a purist and want to ensure you’re never in the wrong place, you need an active manager to sell out and move on when a company changes policy.’
Then there are the results. Although some might suggest that ethical concerns are inimical to bottom-line performance, reams of recent data would suggest otherwise. In November, for example, figures from Morningstar showed that ESG funds were besting the S&P 500 by 45% representing an additional 10% return on investment; then, in February, the EU’s securities regulator reported that ESG investing has actually increased equity returns over the past two years.
Stéphane Soami Mabiala, ESG specialist, EBS Advisory
The rise of ESG continues to challenge investment managers on how they should be responding to growing investor expectations. In this article, we put key ESG questions to three of our leading minds on sustainable investing. First up, we’ve Jens Peers, CEO & CIO of Mirova US and manager of the Mirova Global Sustainable Equity Strategy.
FOR INVESTMENT PROFESSIONALS ONLY.
All investing involves risk, including the risk of capital loss. This material is provided for informational purposes only and should not be construed as investment advice. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of Natixis Investment Managers’ affiliates as of March 2020. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecast, and actual results may vary. Provided by Natixis Investment Managers UK Limited, authorised and regulated by the Financial Conduct Authority (register no. 190258). Registered Office: Natixis Investment Managers UK Limited, One Carter Lane, London, EC4V 5ER.
As more and more firms explicitly adopt ESG practices and launch ESG funds, how do established sustainable investment firms like Mirova continue to adapt? Jens Peers: “As a company whose ‘raison d’etre’ is about creating a positive impact, we’ve been forced to ask ourselves whether the rise of more mainstream managers positioning themselves on the topic of ESG is a good or a bad thing. “I think on the one hand it's positive because it helps raise awareness for companies like ours. Even though many of these companies may have much deeper marketing pockets than we might. But just like the water strategy I was managing back in the 2000s, at the time it probably would not have grown as much as it did if it wasn't for some big competitors spending a lot of Euros bringing attention to water as an investment opportunity. “That said, there’s a big risk of ‘greenwashing’, even though I very much dislike the term. It is important to make sure that people understand what the different degrees or different approaches are to ESG so that they can compare apples to apples. And that's something I feel is still missing in the market. “Do we need to evolve our business model as a result? The way I see it, historically 5-10% of investors wanted to be more sustainable than the average. As the rest of the market begins to move in their direction, they may feel the need to become more extreme. For those clients we have a range of solutions, from Amazon rainforest preservation strategies, ocean clean-up strategies or land degradation strategies. “And we’re continuing to develop new, innovative opportunities that push the boundaries in this area. But we also have strategies for investors that simply want to become more sustainable and impactful in their existing equity or fixed income allocations.”
Next up, Simon Gottelier, co-manager for the Water strategy at Thematics Asset Management.
How do you integrate ESG into your processes? Simon Gottelier: “ESG is a very important part of our risk control process and is consistent through all the strategies that we manage. We recently became a signatory of the UN Principals for Responsible Investment, which is one the world’s leading initiatives promoting responsible investments. “We use a negative screen to exclude parts of the investable universe on ethical grounds. This exclusion list includes controversial weapons, alcohol, tobacco and coal fired power generation. Furthermore, if you consider Water again, we also exclude companies that buy up water resources and sell them at inflated prices to farmers – so-called ‘Water Rights’ companies – as well as branded, packaged water businesses which we feel don’t meet the necessary sustainable development criteria. “In addition to engaging with selected companies in our funds, we also use ESG considerations when sizing positions to mitigate against potential risks in the portfolios. Through multiple resources, we vote all of our own proxies in the portfolios, seeking to incorporate ESG issues into ownership policies and practices.”
Finally, we’ve Carmine de Franco, head of fundamental and ESG research at Ossiam, which has been specialising in quantitative and systematic asset management since 2009.
Why is AI better than human when analysing ESG data? Carmine de Franco: “Being able to use an algorithm stops you being swamped by the sheer mass of data. AI can take into account more subjects than an analyst who will only skim over them. This is why you need to delegate the task of selection to an algorithm. “ESG data is hard to exploit. Analysts outperform AI if they are only looking at a few dozen firms. But the algorithm does better once we start talking about thousands of firms. For instance, an algorithm can identify that a certain ESG profile is often linked to a specific financial behaviour (eg performance) and can then segment stocks by profile type. Machine learning incorporates this profile and others on different ESG issues to create something like a panel of virtual experts, able to determine whether an investment is a risk or an opportunity. “Machine learning applies ex ante rules and observes patterns. At Ossiam, we restrict the space that machine learning can explore. We build in filters via a systematic allocation that allows for the risk that the selection will ultimately happen. So the human being remains in control.”
Mirova, Ossiam and Thematics are all affiliate companies of Natixis Investment Managers. For more on our approach to ESG investing, visit https://www.im.natixis.com/uk/esg-sustainable-investing-solutions
If 2019 was the year in which environmental, social and governance (ESG) investing truly entered the mainstream, its omnipotence has raised as many significant questions as it has provided sufficient answers, says Darren Pilbeam, UK Head of Sales at Natixis Investment Managers.
While integrating ESG criteria has become almost a given in mainstream equity fund management, the fixed income side of investing- and credit markets in particular- are perceived to have lagged. But this is changing rapidly, and fixed income is now seen as one of the most exciting and fast-developing areas of ESG research. Last year researchers at the Wharton Business School produced the first large scale academic study, using a dataset from Truvalue Labs, which established a clear link between poor ESG performance and increased credit risk. Using a dataset that provides systematic coding of material events reported in the media, it engaged with a sample of 342 companies from 13 industries, over the period from 2009 to 2017. The cases included Volkswagen’s emissions scandal, Boeing’s 737 MAX, Wells Fargo’s sales practices, and Vale, responsible for catastrophic dam failures, most recently at the Brumadinho tailings dam in early 2019. According to the study’s authors, Witold Henisz and James McGlinch, there is clear evidence that higher-performing companies on ESG criteria experienced subsequent lower incidence of adverse material events. ‘Companies with lower performance relative to their peers in their industry based on material ESG criteria as defined by the Sustainability Accounting Standards Board (SASB), experienced a higher incidence of adverse material events,’ they wrote. It raises the question of why fixed income is still playing catch-up with equity. Part of the answer is that, as ESG research becomes increasingly commoditised, index providers are still adapting to the very different demands of credit analysis. Ashley Hamilton Claxton, Head of Responsible Investment at Royal London Asset Management, points out that index methodologies were largely developed to work in the equity space and can struggle with the different structures prevalent in credit markets. ‘When they try to apply ESG scoring methodologies to fixed income it just doesn’t work, it’s like apples and pears,’ she said. The problem is that ESG ratings agencies typically roll an equity parent rating down to bond issuers. She gives the example of RLAM holding Western Power Distribution, a bond secured on physical power distribution assets in the UK, whose ultimate parent is Berkshire Hathaway. ‘A typical ESG rating provider would usually just assign Berkshire Hathaway’s ESG score to Western Power Distribution, despite the fact that the business model and risk profile are completely different,’ she said. Another example is electricity generator First Hydro, operator of plants in Snowdonia, whose bond is issued by parent energy company Engie: ‘The ESG risk profile of a hydro-electric plant is very different to that of Engie as a whole,’ she said. On the flipside, the fact that ESG factors a highly material role in credit markets means that credit managers have long included these factors in their analysis, Hamilton Claxton said. ‘Credit managers are constantly focused on downside risk, and don’t care where that stems from- their attitude is “if it’s going to affect whether we get paid as bond-holders, we need to look at it”, she says. In line with the Wharton study, Hamilton Claxton sees ESG factors as able to actively protect against credit risk. ‘For example, we own a lot of gas and electricity distribution bonds in the UK. A company could issue two bonds, one secured on electricity distribution assets and the other secured on gas distribution assets. From a credit and a risk perspective those areas are quite similar, but from an ESG perspective they are very different,’ she says. ‘We were able to say to the credit team that, all other aspects- payment, and financial risk- being equal, we much prefer the electricity-focused bond, partly because there’s talk in the UK of the government phasing out gas distribution by 2050 and switching to hydrogen for home heating in order to meet climate change goals,’ she says. ‘So the question would be what might happen to gas distribution lines. We spoke to companies who said that some could be lined to carry hydrogen, but some cannot- so there is potential risk of financing assets that will be stranded,’ she says.
While integrating ESG criteria has become almost a given in mainstream equity fund management, the fixed income side of investing- and credit markets in particular- are perceived to have lagged. But this is changing rapidly, and fixed income is now seen as one of the most exciting and fast-developing areas of ESG research. Last year researchers at the Wharton Business School produced the first large scale academic study, using a dataset from Truvalue Labs, which established a clear link between poor ESG performance and increased credit risk. Using a dataset that provides systematic coding of material events reported in the media, it engaged with a sample of 342 companies from 13 industries, over the period from 2009 to 2017. The cases included Volkswagen’s emissions scandal, Boeing’s 737 MAX, Wells Fargo’s sales practices, and Vale, responsible for catastrophic dam failures, most recently at the Brumadinho tailings dam in early 2019. According to the study’s authors, Witold Henisz and James McGlinch, there is clear evidence that higher-performing companies on ESG criteria experienced subsequent lower incidence of adverse material events. ‘Companies with lower performance relative to their peers in their industry based on material ESG criteria as defined by the Sustainability Accounting Standards Board (SASB), experienced a higher incidence of adverse material events,’ they wrote. It raises the question of why fixed income is still playing catch-up with equity. Part of the answer is that, as ESG research becomes increasingly commoditised, index providers are still adapting to the very different demands of credit analysis. Ashley Hamilton Claxton, Head of Responsible Investment at Royal London Asset Management, points out that index methodologies were largely developed to work in the equity space and can struggle with the different structures prevalent in credit markets. ‘When they try to apply ESG scoring methodologies to fixed income it just doesn’t work, it’s like apples and pears,’ she said. The problem is that ESG ratings agencies typically roll an equity parent rating down to bond issuers. She gives the example of RLAM holding Western Power Distribution, a bond secured on physical power distribution assets in the UK, whose ultimate parent is Berkshire Hathaway. ‘A typical ESG rating provider would usually just assign Berkshire Hathaway’s ESG score to Western Power Distribution, despite the fact that the business model and risk profile are completely different,’ she said. Another example is electricity generator First Hydro, operator of plants in Snowdonia, whose bond is issued by parent energy company Engie: ‘The ESG risk profile of a hydro-electric plant is very different to that of Engie as a whole,’ she said. On the flipside, the fact that ESG factors a highly material role in credit markets means that credit managers have long included these factors in their analysis, Hamilton Claxton said. ‘Credit managers are constantly focused on downside risk, and don’t care where that stems from- their attitude is “if it’s going to affect whether we get paid as bond-holders, we need to look at it”, she says. In line with the Wharton study, Hamilton Claxton sees ESG factors as able to actively protect against credit risk. ‘For example, we own a lot of gas and electricity distribution bonds in the UK. A company could issue two bonds, one secured on electricity distribution assets and the other secured on gas distribution assets. From a credit and a risk perspective those areas are quite similar, but from an ESG perspective they are very different,’ she says. We were able to say to the credit team that, all other aspects- payment, and financial risk- being equal, we much prefer the electricity-focused bond, partly because there’s talk in the UK of the government phasing out gas distribution by 2050 and switching to hydrogen for home heating in order to meet climate change goals,’ she says. ‘So the question would be what might happen to gas distribution lines. We spoke to companies who said that some could be lined to carry hydrogen, but some cannot- so there is potential risk of financing assets that will be stranded,’ she says.
Deirdre Cooper, Graeme Baker, Co-Portfolio Managers, Global Environment Fund
From record temperatures in the Antarctic to the row over the presidency of the UK-hosted COP26 climate talks, it’s easy to become despondent about climate change. Now the coronavirus crisis, and subsequent oil-price crash, have sparked speculation that efforts to cut emissions will be delayed further. Yet amid the scary headlines, there is still much to be optimistic about the world’s transition to a greener future. There’s an enormous amount still to do to meet emissions targets. But we believe there are at least three reasons for investors to think (and act) positively. After all, negativity will get us nowhere – it’s time for forceful, positive action on climate change. 1) Political and business momentum is becoming unstoppable We’re starting to see political responses to climate change that would have been unthinkable a few years ago. European industrial policy is now based entirely around the low-carbon economy, with the bloc’s leaders looking to halve emissions by 2030. Meanwhile, the UK has brought forward a prohibition on the sale of petrol and diesel cars by five years to 2035 at the latest. The present market turmoil may delay green policies slightly, but we think they are very unlikely to derail them. In fact, we would not be at all surprised if the stimulus programmes likely to follow the coronavirus pandemic strongly emphasise green technologies and ultimately accelerate the energy transition. The response from some sections of the business community has been equally impressive. Confounding most forecasts, new data shows that global carbon emissions from energy plateaued in 2019 as developed economies abandoned coal in favour of wind, solar, natural gas and nuclear — the first time in a decade that carbon emissions from energy have not increased. Meanwhile, UK energy providers generated more electricity from zero-carbon sources in 2019 than from fossil fuels, for the first time since the industrial revolution.
This acceleration of climate action is widening the opportunities for investors. We think there are some great decarbonisation enterprises with solid business models, impressive technologies and defensible competitive positions. Of course, there are also companies that don’t have these attributes, which is why we recommend a highly selective approach. But the assumption that a climate-focused portfolio need be high risk is totally outmoded, in our view. In fact, we’d argue quite the reverse: that a well-constructed environmental portfolio can help balance the climate risk in other investments. What’s more, investing in decarbonisation companies should have a positive impact by aiding the transition to a lower-carbon economy. 2) The focus is shifting to positive investment There are also encouraging signs that more investors are recognising that divesting from carbon-intensive businesses is not, by itself, sufficient. Our recent Planetary Pulse survey found that investors are keen to use their savings positively to help tackle climate change. Some 61% of UK pension fund members said they would be willing for a proportion of their workplace pensions to default into environmental investments. That’s good news because, as the director of the United Nations Environment Programme says, "we need to catch up on the years in which we procrastinated." ‘Catching up’ means a massive and immediate acceleration of efforts to tackle climate change, or else the 1.5C goal will be out of reach by 2030. This shift in emphasis towards positive investment is good for the planet, because it raises the likelihood of meaningful action being taken. It’s also good for investors in decarbonisation, because it will strengthen the tailwind behind the businesses that are shifting the global economy to a lower-carbon model. Specifically, we need to spend heavily on: transforming our energy infrastructure; electrifying transport and other systems; and vastly improving energy efficiency. There are investment opportunities across all three of these pathways to a lower-carbon world.
3) The risk of positive shocks may be rising Though worrying from a planetary point of view, there is a positive investment case to be made from the fact that current efforts to tackle climate change are “utterly inadequate”, according to the UN. We’re spending only about one-quarter of the US$2.4 trillion required each year to stop temperatures rising dangerously. That’s already driving growth for select businesses, but the additional spending required to achieve the Paris Accord emissions targets would put their growth into hyperdrive. It remains to be seen whether the full investment will be made. But the UN’s dire assessment increases the likelihood of regulatory, technological or consumer-choice shocks to get emissions on track. Such shocks would be positive for decarbonisation companies and negative for businesses with high climate-risk exposure. To illustrate the growth potential of decarbonisation businesses, cutting emissions sufficiently to achieve the 1.5C goal would mean increasing wind and solar’s share of the energy mix from 7% to 70%. The proportion of electric cars on the road would need to reach 100%. That isn’t our base case but, after a torrid 2019 for the electric-vehicle value chain, we think 2020 could mark a turning point for the electric car. As an aside, these shocks would only be felt meaningfully in listed equities, which immediately price in changes in expected growth. Green bonds and private infrastructure – other ways that investors might seek exposure to decarbonisation – won’t respond in anything like the same manner, largely because their returns are contracted, which makes their valuations fairly stable. Let’s close with one more positive for investors. Our analysis shows that the consensus is forecasting lower growth for decarbonisation companies than for the market overall. To us, that makes no sense. But it also suggests opportunities to invest in businesses whose potential the market is yet to recognise. If that doesn’t sound like a reason for investors to look forward more positively, We’re not sure what would.
All investments carry the risk of capital loss. Important information This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Ninety One in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contains statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein. All rights reserved. Issued by Ninety One, issued March 2020.
What does the next gen of ESG investors want?
We spoke to several investment experts and asked them for their views on all things ESG. What do they expect from ESG managers, where do they rank an active voting history and how are millennials changing the future of investing? One thing they all agree on: investing is not about profit maximisation anymore – it’s about the wider impact on society.
FULL SCREEN
While climate change and pollution are often discussed emotionally or in the abstract, there are numerous concrete approaches to tackling these problems via investments in innovative companies.
The World Economic Summit in Davos at the end of January showed how much conflict there is in discussions around climate and environmental problems. But while the fronts between opponents and supporters of an intensified climate policy are becoming increasingly tough, many companies have already recognized the direction of travel and are tackling the problem with pragmatic solutions. The climate and environmental protection trend has picked up speed significantly in recent years and the shift to a lower-carbon economy is unstoppable. This has also been recognized by investors who want to give their investment not only an economic but also a sustainable significance. The global drive towards responsible investing continues as companies increasingly tackle the challenges and opportunities arising from climate change. Investors remain who cling to the belief that climate solutions begin and end with alternative energies, but this significantly underestimates the available options.
Not everything is about alternative energy As long ago as 2008 - long before the discussion about climate change dominated the media - Nordea launched its Global Climate and Environment Strategy. When choosing their investment universe, the portfolio managers dismissed the belief that climate protection could be achieved only through alternative energies such as solar or wind energy. Less than 5% of the equity portfolio is currently invested in this area. In fact, the strategy focuses on the areas of resource efficiency and environmental protection. The Resource Efficiency segment in particular occupies a dominant part of the portfolio. True to the motto "The best energy is the one that is not used", the team invests in companies that help to optimize the use of existing resources and improve their efficiency. The German company Rational is a good example of this. This medium-sized company manufactures innovative combi steamers for commercial kitchens, which due to their high energy efficiency can reduce energy consumption by up to 70%. Thanks to the energy costs saved, such a device pays for itself in less than two years. Here, economic arguments are optimally reconciled with a positive ecological effect.
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, subsidiaries and representative offices. This document 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, subsidiaries and/or representative offices.
The rise of intelligent construction In other areas too, such as intelligent construction, there is great potential for increasing resource efficiency - and thus for climate protection. Buildings are responsible for a significant portion of global man-made CO2 emissions. It is now a priority to ensure that the buildings we live and work in are more environmentally friendly and less harmful to the planet. This offers many opportunities for companies that are active in the field of intelligent construction. Solutions here range from the optimization of the planning and construction process, through energy-efficient insulation materials, heat recovery systems and light automation to intelligent energy management software. They all help to reduce the ecological footprint of buildings. Nordea's portfolio managers have identified several attractive investment opportunities in this field that are currently undervalued by the market. The US company Autodesk is one of the well-positioned companies that benefit from this demand because its software for building data modelling increases efficiency across the entire value chain of the construction industry.
Smart farming at a turning point If society wants to ensure that the resources of our planet will be sufficient for future generations, the resource-intensive agricultural sector must be optimized. While technological innovations have led to great advances in almost all global industries, agriculture is still by far the least digitized. However, the smart farming revolution has intensified in recent years, thanks to lower costs for technologies that are now used in a wide range of applications. There are now devices which use robot technology and sensors to improve resource efficiency with regard to fertilizers and water. There is also software that helps machines use cameras and sensors to combine data such as microclimate, soil conditions and pest infestation with real-time weather information (creating a “networked farm”), which can improve the use of assets and reduce inefficiency. Many of the world's leading agricultural groups already offer solutions with added value for the problems of the real world. Here, the strategy's managers see enormous potential in companies such as AGCO, a manufacturer of innovative agricultural machinery, and Trimble, manufacturer of high-quality solutions for GPS control and precision farming.
Invest in climate protection - specifically and efficiently These and other climate-efficient solutions have been combined in a concentrated portfolio of 40 to 60 stocks comprising companies whose products, services or processes save energy and resources and thus generally lead to a lower carbon footprint. While climate measures, regulations and incentive programs are still being discussed at higher levels, investors can make an efficient and direct contribution to combating the climate problem. With your investment you can actively be part of the solution.
Anders Madsen - Managing Director, Head of Institutional & Wholesale Distribution Northern Europe
Much of our core ESG data, reliant on voluntary company disclosure, may become less reliable during a market slump
Sin and hardship have always enjoyed one another’s company. From the Great Depression which sounded the death knell for prohibition, to the downturn of 2008-09 which spurred spikes in alcohol, tobacco and firearms sales, economic turbulence has sent us scurrying for our vices. This timeless trope has led many commentators to assume that ESG will never prosper in a market downturn. That it will simply be elbowed aside as people rush back to booze, cigarettes and other nefarious comforts. But a growing body of evidence suggests that, in fact, a slump in the market could be good news. That ESG is now so robust that, even if the coronavirus and global trade tensions trigger a full-blown recession, it will actually turn crisis into opportunity.
Constant growth ESG’s growth parabola is certainly impressive. In the decade to March 2018, commitment to ESG investing grew tenfold. Last year, investors channelled $20.6 billion (£17.6bn) into ESG funds — almost four times the record set just a year earlier. But there is a fairly obvious caveat here. Apart from the infamous crash a decade ago, the prevailing investment climate has been pretty benign since ESG came into being 15 years ago. As Maria Egan, vice president at Reynders, McVeigh Capital Management says, in recent years ‘investors have been able to just throw a dart towards a particular stock, and it seems to go up.’ ESG has shown signs of robustness, to be sure. In fact, while global AUM volumes declined in 2018, the volume of ESG assets among the world’s top 500 managers rose 23.3%. But is this buoyancy sustainable, or simply the product of novelty and hype?
Can ESG survive a post-coronavirus dip?
Enduring strengths Against this, however, there’s the inexorable rise of the ethical campaign movement. Growing awareness of climate change, coupled with the popularity of influencers like Greta Thunberg, suggest that companies will never again be allowed to forget their wider responsibilities — even in the toughest market conditions. As Francois Millet, an index product manager at Lyxor says, ‘we’re seeing powerful disclosure groups, such as the Science Based Targets initiative, pushing companies to be more open. The pressure for voluntary disclosure is very evident among large caps and we think it’s a trend for the long-term — no matter what governments do.’ What’s more, we’re witnessing a rapid evolution in ESG ratings, which will make them more resilient for the long term. Sustainable investing may have been founded on negative screening tick-boxes, but this has now been superseded by highly sophisticated metrics focusing on risk and exposure. According to Trevor David, associate director at Sustainlytics, the subtlety of modern ESG scoring systems means companies in dubious sectors will not simply be excluded, but rather analysed on their individual merits. ‘Yes, perhaps a tobacco company throws up concerns about product governance, but they might also compare favourably to one that’s involved in oil and gas on other ESG issues.’ Not only does this approach allow ESG indexes to embrace the old ‘sin industries’ in times of strife; many ‘modern’ metrics — like energy efficiency, exposure to work stoppages and over-reliance on foreign markets — correlate directly with business success. Indeed, researchers from Bank of America Merrill Lynch have concluded that investors would have missed 90% of S&P 500 bankruptcies over the past 15 years by holding stocks with above-average ESG credentials.
Long-term picture There are still doubts, of course. Many ESG funds are heavily reliant on tech stocks, hardly known for their reliability in a volatile market. What’s more, the indexes are still missing some key information, with major companies like Siemens reticent about disclosing certain data points. However as new legislation such as the EU’s ‘climate law’ comes into effect, sustainability is likely to become even more important. Soon, being green will be a necessity, not an option; ESG and mainstream indexes may end up mirroring one another. David is certainly bullish. ‘We’re way past the point of this being peripheral. We’re seeing a lot of organic buy-in from investment teams in all corners of the market, who are seeing the value ESG provides.’ Perhaps the biggest danger to ESG is not being forgotten in a downturn. It’s the danger of becoming so important that it is simply subsumed into the mainstream, woven into conventional investment trends. But, as ESG’s advocates will tell you, that’s a pretty healthy state of affairs.
It’s certainly true that much of our core ESG data, reliant on voluntary company disclosure, may become less reliable during a market slump. After all, marketing and corporate communications are usually the first ‘non-essentials’ to be stripped when times get tough. In the next recession, companies may choose to tone down their ethical reporting or block it altogether, feeling that their own sustainability is more important than the planet’s. Another distinct possibility is that investors, seeking havens, will increase their scrutiny of ESG, and start raising some uncomfortable questions. There’s little doubt, after all, that the ethical investment space, particularly ETFs, remains a work in progress, blighted by opacity and inconsistency. Alex Bibani, fund manager at Sarasin, points to a number of index anomalies in recent years, such as the over-rating of Ryanair. ‘We think [the data] is really not reliable at all,’ he adds. ‘Obviously that’s our perspective as an active manager, but it’s backward-looking. They’re looking at annual reports from last year. What happens if a company changes policy in the meantime?’ Faced with these limitations, perhaps investors will echo SEC Commissioner Hester Peirce, who recently criticised ESG for ‘putting artificial constraints’ on capital and said that, in times of crisis, it’s not actually necessary.
By Mike Fox – Head of Sustainable Investments, Royal London Asset Management
In a time of constant ‘me too’ fund launches, why should you care about the launch of the Royal London Global Sustainable Equity Fund? Well, for starters it is distinctly different from other sustainable global equity funds. While Royal London Asset Management (RLAM) has a long and successful history in sustainable investing, we haven’t launched a new sustainable fund for eight years. Indeed, our Sustainable Leaders Trust was launched in 1990, and our Sustainable World and Sustainable Diversified Trusts each celebrated their 10th anniversaries last year. We have focused instead on evolving our sustainable investment process and developing our research resources to deliver consistent top-quartile performance. It’s a great privilege to launch a new fund and we’ve put a great deal of thought into this. We wanted to ensure it was sufficiently different from our existing funds and enhanced investor choice, yet retained the expertise and focus that has informed the success of our current range. We believe we’ve got this balance right and have benefitted from the experiences – good and bad – of other global fund launches. Without being trite, we think of this as ‘last-mover advantage’. Our new fund will expand our existing product range using the same equity-only structure as our UK fund, Sustainable Leaders, and be truly global. This will make the fund attractive to wealth managers and complement the existing Sustainable World Trust, which offers a mixture of equity and debt for those seeking less volatility and more income than a pure equity global fund.
Truly global Another important differentiator is our decision to use the MSCI All Countries World Index (ACWI) as the fund’s benchmark, rather than the MSCI World Index. This brings into play 26 emerging markets (EM) countries as well the 23 existing developed markets (DM). This is far more than a technicality: it creates a much larger opportunity set to seek out the best sustainable companies globally, including in technology-rich, high-growth countries like South Korea, China and India. It also dials down the US from 64% to 56% of the index, giving a more balanced portfolio that reflects global equity weightings. Some may fear this materially increases the risks of the fund compared to more prosaic DM-only funds, yet I believe this fails to understand the impact and value of sustainable investing. The world is changing. How emerging markets develop is crucial for its sustainability. It has become increasingly clear that EM countries will no longer follow the traditional development path of their developed counterparts. This dynamic is creating new risks and new opportunities for companies and investors. Previously, investors have drawn hard lines between developed and emerging markets, but the geographic distinctions between EM and DM companies are increasingly blurring. Many EM companies have significant DM operations and revenues, and vice versa. It is increasingly difficult to define companies this way. As examples, Dutch consumer goods behemoth Unilever generates 45% of its sales from Asia & Africa, while semiconductor bellwether Taiwan Semiconductor Manufacturing Company derives 60% of its revenues from the US. Despite the best efforts of President Trump’s tariffs and coronavirus to disrupt global trade, this confluence between DM and EM is set to continue. Also, as environmental, social and governance standards gradually improve in emerging markets, the ACWI benchmark ‘future proofs’ the fund with the flexibility to invest in the world’s best sustainability ideas regardless of where they are listed. If it sounds a little over-ambitious to go global in one jump, please be reassured that we have been investing in global equities for our Sustainable World and Sustainable Diversified Trusts for over a decade.
Diversity and challenge It may seem bold for the asset management arm of a UK insurance company to claim that it has a distinctly diverse and culturally open-minded investment philosophy. However, while our offices aren’t geographically spread, we have worked hard over many years to create a genuinely open-minded investment process and diverse research resource. Our investment inputs come from all parts of RLAM. Equally as importantly, we have worked hard over many years to develop a democratic and challenging research process, with the whole team’s opinions valued equally. Our resources are notably diverse across gender, culture and nationality, bringing a far higher level of insight and open-mindedness. It is hard to prove and even harder to describe, but I believe our performance to-date is largely attributable to this carefully-nurtured culture. This is backed up by active engagement with our external and independent advisory committee, which comprises leading experts across different disciplines relevant to sustainability. Again, it is made up of people from different backgrounds – this has broken down a lot of the inherent cultural bias that could otherwise have affected our investment thinking. While advisory committees are relatively common for sustainable funds, we believe we have a far higher level of engagement with and challenge from ours. Speaking personally, I have learned so much from working with our committee and feel that I’m a far better fund manager as a result. I’m also delighted that George Crowdy has recently joined RLAM to co-manage the Global Sustainable Equity Fund with me. He came from Janus Henderson, where he was a member of the Global Sustainable Equity team. George will also play a key part in the ongoing rollout of our sustainable investment process.
Constant and consistent So, there are real differences between the new RL Global Sustainable Equity Fund and our existing sustainable fund range. Yet there are considerable similarities that we hope will be reassuring to existing clients. We haven’t changed our sustainable investing philosophy or our investment process. We will continue to draw on the wider investment expertise at RLAM as well as channelling the deep research resources, and allowing ourselves to be actively challenged by our external advisory committee. We have the confidence, however, to apply these core skills and processes to a wider opportunity set to offer a truly global sustainable equity investment fund, and to deliver similar standards of performance to our existing fund range.
For professional clients only, not suitable for retail investors. The views expressed are the author’s own and do not constitute investment advice. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. For more information on the fund or the risks of investing, please refer to the fund factsheet, Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Price page on www.rlam.co.uk All information is correct at February 2020 unless otherwise stated. Issued by Royal London Asset Management Limited, Firm Registration Number: 141665, registered in England and Wales number 2244297; RLUM Limited, Firm Registration Number: 144032, registered in England and Wales number 2369965. All of these companies are authorised and regulated by the Financial Conduct Authority. These companies are subsidiaries of The Royal London Mutual Insurance Society Limited, registered in England and Wales number 99064. Registered Office: 55 Gracechurch Street, London EC3V 0RL. The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Royal London Mutual Insurance Society Limited is on the Financial Services Register, registration number 117672. Registered in England and Wales number 99064.
Mike Fox manages Royal London Asset Management’s highly-rated sustainable fund range. Find out more about RLAM’s full range of sustainable funds, including the newly-launched Royal London Global Sustainable Equity Fund, at rlam.co.uk/sustainable.
‘We take the solutions and the good ESG’
What makes the Global Sustainability Equity fund stand out from other ESG funds? If you want a single global sustainable equity fund, it makes sense to us to take a truly global approach, given the growing importance of some of the companies in developing markets. It follows the MSCI All Countries World index (ACWI), which is around 85% developed and 15% developing. Our decision to include a certain amount of emerging markets exposure is based on future-proofing, because these economies are likely to grow in size and importance, so we included companies such as the Latin American online retailer Mercado Libre and Taiwan Semiconductor. Sustainability in developing economies is on an evolving path though, so we’re not going to be overweight in emerging markets from the get-go. As sustainable investing grows in developing economies, we’ll build our portfolio over time.
Mike Fox manages Royal London Asset Management’s highly-rated sustainable fund range. Find out more about our full range of sustainable funds, including the newly-launched Royal London Global Sustainable Equity Fund, at rlam.co.uk/sustainable.
Q&A with Mike Fox on RLAM’s Global Sustainable Equity fund
How would you describe your investment approach? We follow a bottom-up research driven process which looks at both the company’s financial attractiveness and its sustainability. How clean, healthy or safe are the products and services it provides? Does the business drive the transition to a more sustainable society? In other words, is it part of the solution or part of the problem? We think environmentally poor, socially irresponsible, inadequately governed companies are bad investments. If you have solutions versus problems and good ESG versus bad ESG, we take the solutions and the good ESG. It really is as simple as that. What’s more, picking ESG-friendly companies increasingly comes with a demonstrable financial benefit, whereas doing the opposite results in financial penalties. Where the business is on the cusp of solution and problem, like a fossil-fuelled utility that is trying to switch to renewables, we check if the company has a stated strategy to move in a certain direction – for example towards a higher percentage of renewable power generation. The mix of the business is of similar importance to us: if the majority of the company’s power generation is already based on renewables, that’s a huge plus.
How are the sustainability reporting standards in emerging markets compared to developed markets? There is definitely room for improvement. Sustainability reporting in emerging markets is still patchy, similar to the situation in developed markets 15 to 20 years ago. Yet, even though the mixed quality of reporting can make investment decisions more difficult, it can also give you a competitive advantage. If you are able to analyse companies from scratch, you are in a good position in terms of finding alpha, especially over the medium to long term. Getting access to the information you need can be a challenge though. If you are not part of the company you are evaluating, you are very dependent on corporate governance, environmental and social disclosure policies. Since we can’t audit the entirety of a business to make an investment decision, we look at framework structures, culture and as much disclosure as we can get. We are doing as much as we reasonably can and test all the things that we think should be tested, but, inevitably, there’s a degree of uncertainty.
Are index providers doing enough when it comes to due diligence? There are three things index providers struggle with in that regard. Firstly, there is no simple, single definition of what makes a company sustainable. Secondly, ESG is hard to quantify since it lacks a measurable element of commonality. While every company has a profit and loss, balance sheet and cashflow that you can mine and analyse to a degree, ESG assessment is based on words, not numbers. That can be an issue since indexes work better when they deal with numbers and structured data rather than words and unstructured data. The origin of the data is also a problem since it’s mostly the companies themselves that are the main data providers. Even third-party organisations which promise an objective view of a business get their information from the company. That’s why being able to analyse the data yourself is so important. Interpreting the information in your own way instead of relying solely on third-party providers can help you find a real edge.
Ranking the ‘G’ in ESG
Governance data, unlike environmental or social data, has been compiled for a longer period of time and therefore the criteria for what comprises good governance and its classification has been more widely discussed and accepted. In fact, in a 2003 paper three Harvard researchers were able to construct a Governance Index consisting of 24 governance provisions that weaken shareholder rights. The paper ranked companies based on their scores. More recently, a report by NN Investment Partners found that investors who followed the responsible investment trend focus less on returns from social and governance investing than they do on environmental opportunities. And this result is echoed in data compiled by Russell Investments. Over 300 active management firms were surveyed on the question, and governance was found to be the most important component. Additionally, 80% of respondents said they thought engagement with portfolio companies was crucial. With this in mind, we spoke to Sarasin & Partners and Nordea Asset Management and asked them to outline their criteria for assessing and monitor governance issues at the companies they hold.
The view from Sarasin & Partners Good governance underpins long-term value creation. At Sarasin, we evaluate companies’ governance and engage with them to improve policies as a key component of our investment process. We look for a sound board structure to ensure there is effective management of the company. Directors need to demonstrate strong independence from management and an appropriate balance of skills, experience, time and diversity. Elsewhere, companies’ remuneration structure should be simple and moderate, and executives should demonstrate alignment with shareholders by holding a substantial amount of shares for at least one to two years after they depart. As part of Sarasin’s process, we also scrutinise performance metrics and targets to ensure they are stringent. A robust internal control and audit are also critical to protect shareholder capital. Firms should rotate their auditors regularly (at least every 15 years). In order to avoid conflicts of interest, companies should not use their auditor for substantial non-audit work. We won’t invest if we discover major governance concerns during our extensive due diligence. For existing holdings, we implement an ‘ownership discipline’ that guides us when problems arise. If something concerns us, we will seek to initiate a direct dialogue through correspondence or meetings with chairs or lead independent directors. If initial engagement fails to progress, we will assess whether to escalate by, for example, voting against the directors, filing shareholder resolutions or forming a collective engagement with other investors. On behalf of our clients, all our voting records are disclosed on the Sarasin & Partners website to be transparent about our stewardship activities.
By Kwai San Wong, stewardship analyst
The view from Nordea Asset Management A solid corporate governance structure is essential for long-term investment plans. At Nordea Asset Management we have a set of corporate governing principles that guide us in our role as a responsible investor. We engage directly with companies on their governance performance or through collaborations with other asset managers and organisations. Corporate governance assessments are also an integrated part in our investment decisions. Further, we participate in nomination committees, in which we, together with other large owners in the company, nominate the board to the annual general meeting. We also engage with investee companies and exercise our voting rights, including shareholder rights, board composition, remuneration and risk management, either by being present at shareholder meetings or via electronic proxy voting. We always strive for transparency and on our publicly available voting portal we display how we vote at shareholder meetings as well as in our proxy voting.
By Elin Noring, responsible investment analyst
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1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=278920 2. https://www.nnip.com/it-IT/advisor/insights/press-many-professional-investors-fail-to-see-the-value-of-the-s-and-g-factors-of 3. https://russellinvestments.com/uk/blog/2019-esg-survey
Good governance underpins long-term value creation
we asked investors whether E, S or g factors have the most potential to drive long-term returns
