How standardisation will help broaden ESG’s appeal
Brewing up a revolution
Labels, rating agencies, events, outlooks and more
An ESG infusion
How standardisation will help broaden ESG’s appeal
A great leap forward
The InvestmentEurope Pan-European ESG Summit
Finding common ground
What ESG’s move into the mainstream means for equities and commodities
InvestmentEurope’s future programme of of summits, roundtables, forums and awards
Editorial Director: Jonathan Boyd
Head of Sales: Eliot Morton
Head of Marketing: Vanessa Jagessar
Head of Events: Alex Whitely
Head of Fund Selector Relations: Vanessa Orlarey
Managing Director: Louise Hanna (maternity), Kevin Sinclair
Chairman: Nick Rapley
An ESG infusion
“The ongoing infusion of ESG ideas at the product level leaves scope to focus on related developments in other areas
Jonathan Boyd, editorial director, InvestmentEurope
As noted in our July/August issue of the InvestmentEurope magazine, there is an awareness that has developed across the industry more broadly as to the ongoing infusion of ESG ideas at the product level among fund managers, which leaves scope to focus on related developments in other areas, such as among services providers relied on by said managers.
In this ezine, we have highlighted a couple of them: the role of labelling and the aims of credit rating agencies – which is of critical importance for those seeking to shift their ESG stance in the field of fixed income.
What is clear is that there are currently different approaches being applied by different label providers and different rating agencies, while equally clearly the European Commission seems to be on a path towards harmonisation of standards. Until this becomes reality, buy side professionals will need to understand how these different services providers are approaching ESG and sustainability – however they may be defined.
Also included is a report from our own ESG Summit, which took place in Zurich in June 2019 – along with photographic and video highlights. We are of course planning further events for Europe’s fund selectors, and have included a handy calendar of the events approaching through the second half of 2019. We should soon have a calendar for 2020 in play – keep an eye out for this by visiting our events section on the website.
Europe’s labelling regimes
Label standardisation remains one of the hurdles to overcome if ESG investment is to broaden its appeal
Seeking labelling standards
Standardisation of labels to assist those making suitable investment choices for ESG purposes is one of the key hurdles remaining to broader uptake. Cherry Reynard looks into the challenge
Just as consumers increasingly consider the environment when buying their washing powder or choosing their fridge, so they are looking at the impact made by their investments. The most recent Eurosif Survey found that impact investment, for example, increased five-fold from 2013 to 2017. However, differentiating and selecting between ESG and sustainable products remains a problem with a range of standards and criteria applied.
‘GREEN’ IS IN THE EYE OF THE BEHOLDER
As a result, investments with an eye to environmental, social or governance factors, whether driven by ethical or responsible investor considerations, has become an alphabet soup of acronyms with few investors completely sure what they are getting when. Governments, regulators and the fund industry have all recognised the problem and, increasingly, are scrambling to introduce labelling regimes to fix it. That said, the proliferation of labels may now be causing more problems that it is solving.
Individual countries have launched their own labelling efforts – the French government’s ISR regime, for example, or Germany's FNG label, which has also been adopted by Switzerland and Austria. Private groups have also built their own widely-adopted labelling regimes, such as the not-for-profit group LuxFLAG, or France’s Novethic.
The European Commission is attempting to bring some harmonisation to these labelling efforts, releasing a mammoth 414-page report defining its interpretation of ‘green’ finance. The Commission’s Technical Expert Group (TEG) has devised a taxonomy to offer investors and companies a classification system to help investors measure the real world impact of allocating capital.
Feedback regarding the classification system will run from 1 July to 10 September 2019. Novethic said: “The battle over the European classification system for sustainable activities has begun.”
Ben Nelmes, head of public policy and programme director at UKSIF, says: “People should know what they are buying – we should have a common language for sustainable funds. It should be like looking for a new washing machine. The idea behind any eco label is that you capture the top 10-20% of the market, though how you set the criteria will influence that.”
The new EU proposals are relatively prescriptive and would exclude funds that focus on engagement, for example. As they stand, the proposals specifically exclude areas such as fossil fuels, pornography and pesticides. They rule out companies that have human rights violations; and would also rule out the government bonds of countries not signed up to the Paris Climate Change Accord, which would prevent funds that invest in US treasuries making the grade.
However, implementation is some way off. The EU is consulting on its proposals for much of this year and implementation isn’t likely to begin until next year. As it stands the labels are only set to cover retail investors, though there are ambitions to extend them to pension funds at a future date.
“As it stands there are a number of different labels but each of them is really different in what it is trying to do. This is because they are built for local markets”
Sachin Vankalas, LuxFLAG
Meanwhile, investors must work with what they have. The group behind the LuxFLAG label has existed since 2006 and has a granular offering covering microfinance, environment, ESG, climate finance and green bonds. To date, this differentiation is rare among labelling providers, with most offering a one-size-fits-all eco-label.
Sachin Vankalas, general manager at LuxFLAG, says: “At an EU level, they are trying to harmonise different definitions and standards, but as it stands there are a number of different labels but each of them is really different in what it is trying to do. This is because they are built for local markets: the French label is used by French funds and so on.”
Luxembourg has long had an advantage in that its funds tend to be sold cross-border so it has had to take an international approach from the start. Its labels cover seven different jurisdictions, including Europe’s two major fund markets (Luxembourg and Ireland). Vankalas believes this gives LuxFLAG a major advantage over other labelling agencies.
For Vankalas, there is also a difference in how the labelling companies are owned. LuxFLAG is a non-commercial not-for-profit organisation. Others will have the support of the domestic government, or be set up by the fund groups themselves: “It is all about best practice. To our mind, not all labels are completely independent,”
Most labels, including LuxFLAG follow a similar revenue model. A fund group will apply to receive a label and then be rejected or approved. LuxFLAG charges for use of the label and it must be renewed annually. It is here that the ‘not for profit’ is important - otherwise the temptation might be to lower the criteria so more people pay for labels, devaluing the brand.
There are also a number of government-backed labelling programmes: the Nordic Swan label covers all the Nordic countries. It was born out of an initiative proposed by the Swedish government at the Nordic Council in 2015. The Nordic Swan label was already an established label across other sectors such as household cleaning products or televisions, but also manufacturing processes in areas such as printing.
The Nordic Swan criteria are more stringent than in other countries and more in line with the proposed EU labels. They have a number of specific exclusion criteria, for example.
A Nordic Swan Ecolabelled fund cannot invest in companies extracting, refining or generating electrical power from fossil fuels or uranium, or that violate human rights or are involved in the making or selling of controversial or conventional weapons or tobacco. The funds then receive a positive score for good practices, such as investing for impact.
This is different to the French ISR labels. These are judged by six criteria – including whether ESG objectives are clearly defined and integrated into the fund’s investment policy, the ESG methodology, the group’s engagement policy, and how the positive impacts of ESG management are measured.
This is a more flexible approach and doesn't have strict exclusion criteria. Funds such as the M&G Pan European Select fund and Carmignac Emergents have ISR labels, yet both are relatively ‘light green’ in their approach, focusing on engagement rather than exclusion.
Other countries are following suit: the Belgian financial sector federation Febelfin has created a sustainability label to set a quality standard for sustainable financial products, including investment funds. This will be available from the autumn. Germany's FNG label, also used in Switzerland and Austria, has specific exclusions – including nuclear power and armaments, plus those companies in breach of environmental laws.
There are also private companies in the mix – Morningstar created the Morningstar Sustainability Rating in 2016, covering 20,000 funds. It is also in the process of implementing the MSCI ESG Fund Quality Score, ultimately expected to cover 21,000 funds and ETFs. Novethic has its GreenFin label, which is also widely used. It is based on three pillars: the green share and exclusions, ESG criteria and positive impacts.
It should be said that labelling remains a controversial practice. Many believe that a binary green/not green assessment does not reflect the complicated and nuanced nature of investment funds, companies or science. The European Commission is likely to have a battle on its hands as it seeks to find common ground on what is ethical and what is not and therefore what should be in scope for the new labels. Nevertheless, in the end, it should allow investors to find those funds that most closely meet their criteria.
A great leap forward
Expect an explosion of offerings as the big rating agencies add ESG factors to their categorisations
A great leap forward
As the big guns of the rating agency world have turned towards including ESG within their products, investors can expect an explosion in the type of offerings available going forward. Eugene Costello reports
In April this year, Moody’s confirmed that it had bought a majority stake in Vigeo Eiris, a Paris-based provider of environmental, social and governance (ESG) research and ratings.
Two years earlier, Moody’s and S&P Global signed up to the Principles for Responsible Investing (PRI), lending further weight to the idea that in the area of rating services there has been a quiet revolution ongoing for the past decade.
The role of rating agencies is crucial in investment decisions and fund allocation in respect of objectives that fall under the broader umbrella of ‘ESG’ or ‘sustainability’; they allow fund managers to assess such concepts in relation to companies and bond issuers.
“There is no single set of ESG definitions or metrics that is comprehensive, verifiable and universally accepted”
Vincent Allilaire, Moody’s
Assets invested sustainably have passed the $30trn mark, according to the Global Sustainable Investment Alliance, which takes ESG rankings into account when producing investment recommendations.
Vincent Allilaire, vice president – senior credit officer at Moody’s says: “ESG issues have always been part of our analysis, to the extent they have a material impact on the issuer’s creditworthiness.”
“We seek to incorporate all material credit considerations, including ESG issues, into ratings and to take the most forward-looking perspective that visibility into these risks and mitigants permits.”
He points out that materiality, time horizon and credit impact of ESG issues vary widely by sector and issuer.
“The renewed focus of investors and issuers alike on these issues has prompted us to make this analysis more explicit.”
For S&P Global, Mike Ferguson, director – North America Energy Infrastructure and Sustainable Finance, S&P Global Ratings, agrees with this thrust.
“ESG factors have always been considered as part of our ratings process, and if you look at the environmental, social and governance lookback studies we have produced, you will see that, historically, many ratings actions have been driven by ESG factors.”
“In recent months, we’ve made the connection more transparent by calling out these factors separately, both by company and by industry, in our ESG in Ratings Report Cards and in our credit rating reports.”
“The level of data we have access to and analysis that CRAs (credit rating agencies) have produced on entities, many of which include insights into their ESG profile, are crucial in presenting a picture of a company that is in the round. Understanding that there is a need for setting standards in the market around ESG reporting is a key factor in why the market might turn to a company’s credit rating.”
Ferguson adds a note of caution, saying that a credit rating is meant to assess a company’s ability to pay back their debt. Thus, while material ESG factors have always been a part of that, the rating does not paint the full ESG picture.
“When you are specifically looking at ESG, you are assessing a company’s risk factors and future preparedness as it pertains to ESG risks and opportunities,” he says.
To that end, S&P Global recently launched its ESG Evaluation, which, he says, provides a “cross-sector, forward looking, qualitative, and data-driven opinion of an entity’s ESG performance and preparedness for future risks and opportunities”.
A key feature of ESG Evaluation is that it builds upon analysts’ sector expertise and engagement with management while maintaining objectivity.
“When you are specifically looking at ESG, you are assessing a company’s risk factors and future preparedness as it pertains to ESG risks and opportunities”
Mike Ferguson, S&P Global
“It is a separate analysis from the credit rating, but we believe products like this will provide issuers the objective insight they are seeking on their ESG profile,” says Ferguson.
For Moody’s, Allilaire says that the classification of ESG considerations across financial markets is imprecise, due largely to the multiple and diverse objectives of various stakeholders.
“There is no single set of ESG definitions or metrics that is comprehensive, verifiable and universally accepted,” he points out.
Allilaire adds that “the definition of ESG issues is also dynamic because what society classifies as acceptable evolves over time, resulting from new information – such as the impact of carbon dioxide emissions – or changing perceptions – such as, what constitutes privacy.”
In Moody’s credit analysis, says Allilaire, the agency seeks to be comprehensive, incorporating the broadest possible view into all material considerations that can affect the credit quality of an issuer or sector; as noted by Ferguson at S&P Global, the ultimate aim is to give the clearest possible picture of a company.
“Our objective is to capture all considerations that have a material impact on credit quality,” he says.
So what are clients asking for in terms of weighting towards ESG factors in determining credit ratings? Are some asking for a much greater weighting than others, and if so, what could explain such differences?
Allilaire says that Moody assess ratings according to published and transparent methodologies.
“We have published a cross-sector methodology (see left) which sets out a broad conceptual framework to consider current and developing ESG risks that can affect credit quality for issuers and transactions in all sectors.
“The materiality, time horizon and credit impact of ESG issues vary widely. Issuers’ fundamental credit strengths or vulnerabilities can mitigate or exacerbate credit impacts. In some cases, ESG considerations can be a credit strength,” he adds.
For S&P Global, Ferguson states that it’s important always to look at ESG factors within their ratings. The framework on S&P’s policies on governance, conflict of interests and independence are all covered by regulation and supervision, he points out.
“However,” he stresses, “in general the market and investors in particular are not strictly looking for better information on ESG, but a better and more consistent way of tying information together. Data provided by issuers are not always consistent or on the same scale and, increasingly, a narrative surrounding both the relative importance of the data points and the way in which management mitigates the underlying risks is desired.”
This is one of reasons S&P brought ESG Evaluation to market, he says, since it ties together the ESG data that companies usually report, and it also captures information on risk mitigation and strategy gained from face-to-face meetings with an entity’s senior management to produce a final ESG Evaluation score.
And what about the types of bonds assessed and rated? Do certain types of bonds lend themselves to more easily being rated according to ESG factors, such as standard corporate bonds from larger sized companies, rather than contingent convertibles (Cocos), convertibles, and so on?
Moody’s’ Allilaire says that ESG factors differ per issuer, not per instrument type. So, in this regard, ESG considerations and their importance to issuers’ credit profiles can vary widely across all sectors, he says. “For example, the ESG issues material to a sovereign are likely to be substantially different from those that are material to a mining company.”
In many sectors, all issuers have a similar level of exposure to ESG risks, he adds. “In these cases, ESG risks may differentiate ratings in the sector relative to other sectors, but they typically only differentiate ratings within the same sector when an issuer is unusually strong or weak in a particular aspect of ESG.”
In fact, Moody’s has published a comparative relative assessment of the credit exposure of 84 industry sectors to environmental risks (see right)
“This study highlights that 11 sectors have elevated credit exposure to environmental risks, says Allilaire. “Coal mining and terminals, and unregulated utilities and power companies have already experienced material credit pressure as a result of environmental risks.”
“For the remaining nine sectors – automotive manufacturers, building materials, commodity chemicals, mining, oil and gas exploration and production, oil and gas refining and marketing, steel, shipping, transportation and logistics – exposure to environmental risks could be material to credit quality within three to five years.”
For S&P Global, Ferguson says that increased transparency on ESG factors can improve the investors’ ability to understand the risks and rewards of any instrument, but it’s probably especially true for longer dated investments.
“We believe that, over the longer term, ESG risks may become more pronounced, but, also the response to disruptive forces can prove to be a positive differentiator. Overall, it’s just as important for an entity to be adequately prepared in addressing future risks as it is for an entity to assess their overall ESG profile”, says Ferguson.
ESG has for some time been a key snapshot of a company’s profile and creditworthiness; the view from these two leading CRAs suggests that these factors will become increasingly crucial thanks to greater regulations and supervision.
Putting information to work in pursuit of sustainability
A full report from InvestmentEurope’s first dedicated ESG Summit, held at the Dolder Grand, Zurich on 13-14 June
The Pan-European ESG Summit
InvestmentEurope’s first dedicated ESG Summit took place in Zurich, and proved a hit for its ability to impart information from product providers, auditor, impact association, data analysis and research houses and practitioners. Jonathan Boyd reports
Hosted at the Dolder Grand on 13-14 June, the ESG Summit Zurich 2019 was built on increasing demands for information about how to analyse ESG factors and apply them to investment processes in pursuit of sustainability objectives.
This has been a growing area of interest for both fund providers and fund buyers over the past few years, not least because the growth in relevant data is making it increasingly hard to, for example, debunk the link between carbon emissions and global warming.
Investors have continued to sign up to the UN Principles for Responsible Investing (PRI) and seek out ways to support the UN Sustainable Development Goals through particular strategies, without losing sight of the fiduciary duty as it has historically been defined.
This event therefore brought together not only portfolio managers and others to discuss their ESG portfolios; but also added a significant layer of analysis of the state of ESG investing through presentations from data and data analysis providers and its evolvement through both passive and active strategies
There were views from the quantitative investment community, and on how the accounting community views its role in supporting implementation of ESG investing, something that has become increasingly important in mind of reporting requirements set to be placed on the industry on factors such as carbon intensity.
Leading off the event was a panel discussion, which elicited responses from fund selector panelists about their experiences making the shift towards ESG (see boxout ).
This was followed by a presentation illustrating the practical challenges overcome in becoming a signatory to UN PRI.
Thierry Feltgen, head of Product Management & Client Services, BLI – Banque de Luxembourg Investments, outlined how the provider set up its ESC concept, implemented a voting policy, and developed an ESG approach in fixed income.
Following this introduction to the real world implementation of UN PRI, the delegates heard from Michael Fraikin, global head of Research, Invesco Quantitative Strategies at Invesco, who explained the research done so far into whether ESG as a factor can work as well as, and alongside traditional factors in quantitative investing, such as quality, momentum or value.
His conclusion was that on the basis of current research, the answer has to be no. Indeed, he concluded that in respect of existing “off-the-shelf” ESG factors, “forcing portfolios to be positively exposed to ESG hurts performance”.
However, this is not the whole story. Fraikin noted that quantitative managers, in his view, remain at the forefront of ESG investing, and that there is increasing academic interest in this field of investing. The availability of data and insights are “mushrooming”. He concluded that holistic integration of key aspects is the way to go.
Following on from the quants story, Asha Mehta, senior vice president, portfolio manager, director of Responsible Investing at Acadian Asset Management, outlined the manager’s approach to ESG, including use of big data and materiality can make a difference to the performance of a portfolio.Active ownership is important when engaging, she noted.
Mehta was joined on stage by Nicolas Crochet, co-CEO, Funds for Good, who outlined how his organisation has been bringing together investors with entrepreneurs setting up and running micro businesses.
Shifting the discussion into the realm of data science, Philipp Aeby, CEO, RepRisk discussed how machine learning can combine with human analysis to meet investor needs. In the field of ESG, this is increasingly required to identify particular data sets of use to investors. But with the ever rapid growth in the volume of data globally, using tools to automate analysis of data is becoming increasingly important.
Also touching on data, albeit of a slightly different nature, was Hortense Bioy, director, Passive Strategies and Sustainability Research, Morningstar, who discussed the arguments based on data sets of pursuing ESG investing via passive funds rather than active ones.
The second day of the conference started with another panel session (see boxout) before delegates were treated to an update on the latest research conducted by FNG – Forum Nachhaltige Geldanlagen, which is effectively the SIF, Sustainability Investment Forum, covering German speaking markets.
Angela McClellan noted that the 14th study of investment markets in Germany, Austria and Switzerland, found that in Germany, sustainable investments increased by almost a third from 2017 to 2018. In Austria sustainable investment funds and mandates have a 12.8% market share, with the Swiss market share at 18.3%.
Yu Shimizu, lead portfolio manager, SPARX Group explained his approach to sustainability in context of ongoing regulatory support for governance standards, and the ‘sustainability’ challenge of Japan’s demographics.
The use of artificial intelligence in ESG data and portfolio construction was addressed by Thomas Kuh, head of Index, Truvalue Labs; after which Phil Davis, assistant director, Sustainability & Climate Change, PwC, discussed the expectations he has developed with respect to Europe’s ESG initiatives.
The first panel of the event highlighted the shift to ESG as experienced by buy side professionals. Panelists included Luiz Gonzaléz, fund selector, BBVA Quality Funds; Patrick Lenhard, director, Multi Manager Solutions, Vontobel; and Tanja Wennonen-Kärnä, senior portfolio manager, Evli Bank.
The key questions addressed by the panellists included:
- Asking about the context of both their personal and company journeys towards ESG;
- Their views on the reality of ESG versus the ‘noise’ in the industry; understanding which vehicle types and asset classes could benefit from the shift to ESG; and Ttheir views on where the industry heads next in respect of ESG implementation.
Leading of the second day of the Summit was a panel including Mussie Kidane, head of Fund and Manager Selection, Banque Pictet & Cie, and Sven Rump, CIO, Schweizerische Mobiliar Asset Management.
This brought together a key Swiss view of ESG, from fund buyers working in very different spheres – one serving investment needs (Pictet), the other very domestic insurance needs (Schweizerische Mobiliar).
Again, the panellists were asked about their own and their businesses’ journeys to ESG, but they provided different insight, driven by the different backgrounds of the businesses.
They were also asked for views on ESG data and fiduciary responsibilities, with Rump in particular noting that his organisation had developed a broader definition of fiduciary responsibility than that which is normally required of investment professionals.
Both panellists acknowledged the danger that the industry more broadly would use ESG related developments to maintain fee levels advantageous to providers, but which would be difficult as increasing ESG reporting requirements are brought into being.
Both panels were moderated by Jonathan Boyd, editorial director, InvestmentEurope.
Walking the talk
Incisive Media and InvestmentEurope are committed to events becoming more sustainable, which is why they are using the guidelines set out by the Sustainable Event Alliance and aim to meet the International Standard ISO20121.
The goal is to reduce paper consumption across events and improve recycling rates, curb food waste and alter menus with an aim to include locally sourced, organic produce.
It also means commitment to offsetting carbon related to events wherever possible, and to provide delegates with accessible venues.
Ongoing evaluation means each event will be considered for improvements in the areas of energy, transport, water usage, recycling, economic and local environment/community.
Incisive Media, parent group and publisher of InvestmentEurope, has partnered with Ecosphere+ to ensure all remaining greenhouse gas emissions are offset.
This involves calculating emissions from all events, including event operations, venues and delegates, to then purchase carbon offset credits. These credits are supporting protection of rainforest in Peru.
For further information about the project visit:
Philipp Aeby is CEO of RepRisk. He joined RepRisk in 2006, holding positions of COO and managing partner before becoming CEO. Previous experience at Amgen, a biopharmaceutical group, and Boston Consulting Group. He is a member of the Global Advisory Council of Cornerstone Capital Inc and of the Business Advisory Board of the Swiss Peace Foundation.
Hortense Bioy is director, Passive Strategies and Sustainability Research at Morningstar. Based in London, she joined Morningstar as an equity ETF analyst in 2010 from Bloomberg. She leads a team that provides independent research on ETFs and index funds. Since 2017, her responsibilities have expanded to include sustainability research in Europe. She leads Morningstar’s ESG thought-leadership agenda in the region. Her career started as an M&A analyst at Société Générale in Hong Kong.
Nicolas Crochet is co-CEO of Funds for Good. He started his career as a private banker at Banque Belgolaise and then Prudential Securities. He joined State Street Global Advisors in 2006 as head of funds distribution for Benelux and Nordic regions. Created Funds for Good in 2011 to combine concrete social impact with good financial return.
Phil Davis is assistant director, Sustainability & Climate Change at PwC. He joined PwC in 2008 following work at AMEC Earth and Environmental as a technical environmental consultant. Had central role in developing PwC’s ESG due diligence and portfolio review service. Involved in identification of ESG related opportunities an validation through cost benefit analysis of potential ESG initiatives across sectors. Has developed ESG investment procedures and online platforms for banks and private equity clients, and Excel based toolkits for investment teams to screen for ESG risks.
Thierry Feltgen is head of Product Management & Client Services at Banque de Luxembourg Investments. He joined Banque de Luxembourg in 1999. In 2000, he specialised as a fund analyst focusing on bond funds selection and covered bond investments in multi-management portfolios. In 2007, he joined BLI’s fixed income team as a fund manager. In 2010, he took over responsibility for investment communication activity on BLI’s fund range and to act as a product specialist in support of sales team.
Michael Fraikin is Global Head of Research at Invesco Quantitative Strategies. He joined Invesco in 1997 as portfolio manager for European equities. Since the formation of the global quantitative investment team in 2003, has been a director of portfolio management. Appointed head of Research in 2015, he also serves as a member of IQS’ management team responsible for strategic planning and direction. Started his career at Commerzbank in 1991 as a buy side analyst of European equities.
Thomas Kuh is head of Index at Truvalue Labs. He leads Truvalue Index, creating benchmarks for implementing ESG investment strategies and licensing indices for ETFs, mutual funds and institutional accounts. Previously, he was founder and president of Benchmark ESG Consulting LLC, and before that Executive Director, Head of ESG Indexes at MSCI. Spent 16 years at KLD Research & Analytics, and service on the boards of SIRI Company (now Sustainalytics) and the US SIF.
Angela McClellan is executive director at Forum Nachhaltige Geldanlagen (FNG). McClellan represents 190 members of the sustainable finance industry advocating for transparency, quality and growth of sustainable investments. Before joining FNG in 2018, she led global advocacy and communication of Transparency International’s Business Integrity team. Before that she worked for InWEnt Capacity Building International (now part of the German Association for International Cooperation).
Asha Mehtais is senior vice president, portfolio manager, director of Responsible Investing at Acadian Asset Management. She joined Acadian in 2007. Responsible for building Acadian’s ESG principles by leading ESG research and subsequent integration of ESG factors throughout the manager’s investment process and serves chair of the Responsible Investment Committee.
Yu Shimizu is the lead portfolio manager of the Japan Sustainable Equity strategy at SPARX Asset Management in Tokyo, a role he has held since 2012. Before joining SPARX in 2005, he was working as an analyst at UFJ Partners Asset Management (currently Mitsubishi UFJ Asset Management) and prior to that as an analyst at Yasuda Capital Management (currently Yasuda Asset Management).
Starting with an ‘E’
The common ground between ESG and ETFs
Starting with an ‘E’
ETFs and ESG have a letter in common, but is that all they share? Jonathan Boyd, Ridhima Sharma, Eugenia Jiménez and Elisabeth Reyes report on developments
For investors adhering to responsible investment dogma, there comes a point when, generally speaking, they need to decide whether to blacklist companies or pursue engagement.
While there is no definitive answer as to which approach works best in mind of the end goals – inducing positive outcomes as well as making positive returns – the very fact that there is an active choice to be made suggests that those pursuing a passive approach might not be able to make as much of an impact.
That suggestion is wrong, argues François Millet, head of ETF Strategy, ESG & Innovation of Lyxor.
“In the European ETF industry, ESG ETFs represent €13bn - as of end-March 2019 - following inflows of €2bn in 2019 and € 4bn in 2018, where ESG ETFs assets under management have grown by 45%,” he says.
“Considering that ETFs are the fastest growing segment of the AM industry, ESG ETFs are themselves growing much faster than the overall ETF market; they still represent only 2% of ETF AUMs in Europe but already 10% of ETF inflows with an acceleration in 2019. We cannot ignore the role of passive management.
“The foundations on which passive management is built – transparency, accessibility, limited management fees – mean that ETFs are particularly well suited to socially responsible investment.
“Little in terms of methods. Verification of real and effective ESG remains a major challenge for investors”
Danilo Pone, ENPAB
“With greater consideration given to the challenges that lie ahead, all types of investor are now looking to factor ESG solutions into their portfolios or savings. Retail and private banking clients place considerable importance on this subject – younger generations – millennials - in particular. Institutional investors too are showing interest in responsible investment in order to meet expectations of beneficiaries, to better manage long-term risk and to comply with regulatory developments.”
However, there is more to come from the ETF industry, not least because of regulatory developments.
Millet notes: “The regulatory evolution will bring more clarity for investors on the objectives, the standards, the taxonomy, the reporting requirements, and the labels applicable to ESG investing, starting with green investments.
“For the first time, indices will be used by policymakers as a tool to guide investor choices and re-direct investment flows towards climate transition and alignment with the Paris Agreement objectives.”
Koen Van de Maele, global head of Investment Solutions and member of the Executive Committee of Candriam points to ESG integration into the investment process as a reason why they should be seen as providing a suitable response to ESG demands.
“Candriam uses the same ESG analysis in its IndexIQ ESG ETFs than the one applied in Candriam’s sustainable fund range. This means that we don’t simply rely on some rule-based selection, but we integrate the knowhow and experience of Candriam’s ESG team of analysts in the ETFs.
“Candriam’s ESG analysis is based on an assessment of the companies’ business model, complemented with a stakeholder analysis. Additionally, a norms-based analysis and a filter on controversial activities is applied.
Van de Maele continues: “Classical ETFs, based on standard market capitalisation indices simply buy all available stocks, irrespective of the environmental impact of these companies. As public awareness of ESG topics in general, and the climate change issue in particular, have substantially increased, we can expect that more investors will ask for ETFs that integrate ESG criteria. Investors will also want to know what the ESG impact is of their investments.
“Thematic funds and ETFs that focus on environmental, social and/or governance aspects are more in demand. Candriam expects that this trend will continue.”
Are passively managed ETFs equally able to engage on ESG issues as active funds?
Hortense Bioy, director, Passive Strategies and Sustainability Research, Morningstar, notes that while increasing numbers of ETF providers have signed up to UN Principles for Responsible Investment (PRI), and are implementing a responsible investment policy, investors need to understand that actions such as voting at company meetings is only something that can be done by Physical ETFs.
“Synthetic ETFs do not vote,” notes Bioy.
Having an engagement policy is important, Bioy continues. With more stewardship teams now in place at passive managers, it means that there should be more dialogue with managers of companies. It is also important to remember that many passive managers are also active managers – so, for example, if there is voting on a business such as Renault, it will be done through both active and passive portfolios.
That said, there are still differences between large active and large passive managers. Those such as BlackRock and Vanguard will tend to pick a theme with an eye to raising standards across the board globally – rather than discriminate between company a and company b on any particular ESG factors, she suggests.
Thus, on themes such as climate change, diversity, board remuneration, the engagement will be focused on understanding which companies do things best, which are considered leaders in their respectively industries, and based on that information pursuing discussions with other companies. They are trying to effect systemic change, she suggests.
FIXED INCOME VIEW
David Katimbo-Mugwanya, co-manager of the Amity Sterling Bond fund at EdenTree Investment Management, points out that improvements in ESG data is allowing for a more quantitative approach to investing responsibly and sustainably.
“The prevalence of richer datasets has even led some to consider sustainability as a trend or a factor that can be dialled up as another source of alpha. Our view is such criteria should be firmly integrated into an investment process and complemented by engagement, with the ultimate aim of embedding these intended outcomes into investee companies.
“The exclusion of particular companies from a permissible investment universe could, subsequently, be a logical conclusion depending on how enforceable the criteria are and their respective tolerance thresholds. It is therefore difficult to envisage the incorporation of ESG criteria into an existing bond fund, absent of fundamental change to its investment process or without some form of impact to the fund’s stated risk-return profile, the latter of which could trigger a requirement for regulatory approval.”
“As public awareness of ESG topics in general, and climate change particular, have substantially increased, we can expect that more investors will ask for ETFs that integrate ESG criteria”
Koen Van de Maele, Candriam
Jonathan Bailey, head of ESG investing at Neuberger Berman, says: “Our credit analysts have integrated material environmental, social and governance factors into fundamental analysis for many years. That allows Neuberger Berman to have proprietary ESG ratings on every credit that we invest in – even those where third party ESG ratings providers do not have coverage like the private loans market.
“Our credit analysts are constantly looking at how they can improve their ESG ratings - for example in the last year they have incorporated insights on human capital management from Glass Door data. They also engage directly with management teams which adds qualitative insight to ESG ratings. We expect to continuously improve our ratings as companies provide greater disclosure.”
Justin Craib-Cox, co-manager of the RWC Defensive Convertibles fund, agrees most bonds “…already have a credit rating, yet investors expect active managers to know what could cause a published credit rating to change, and to make a move before that event happens”.
He continues: “The same should be true for knowing if an issuer might have a material financial impact from an ESG factor. ESG analysis helps to create a framework for a manager to understand the health of the firm’s governance and its interactions with customers and others, giving it a better overall picture of the health of an organisation.
“Our view is that integrating ESG analysis into the fundamental review of an issuer should allow for predictive – rather than reactive – use of this data.
“In constructing bond portfolios with a quality bias, we do believe issuers considered best-in-class for ESG factors can help to avoid downside caused by controversies. But we also recognise that some issuers are in the process of improving their ESG profiles and using only historical ESG scores and rankings without making a view on future direction may miss these opportunities.
Brian Higgins, partner, Dillon Eustace, points out the emerging regulatory burden set to hit investors, including those using ETFs.
“The European Commission is focused on: (i) developing regulations for a common taxonomy/classification for sustainable activities; (ii) disclosure of ESG related risks and how they are incorporated into the investment process; and (iii) low-carbon benchmarks,” he notes.
“To supplement these proposals, the European Securities and Markets Authority provided advice to the Commission on possible amendments to AIFMD and the Ucits Directive at the end of April. It is intended that these proposals will bring greater clarity and transparency which will boost investor confidence in ESG products.
“Each ETF will need to consider the implications of the EU legislative package as it applies to them in order to determine the level of impact which it may have upon them and manage any necessary transition.”
Looking to the question of whether it is harder to launch new bond funds that have ESG factors embedded rather than added to existing funds, Craib-Cox says the answer “probably depends on whether a team has already developed an understanding of ESG factors”.
Finnish manager Evli’s CIO Mikael Lundström and head of Sustainability Outi Helenius note that data will play a bit role in credit investors paying more attention to ESG.
“In particular, improved and comparable data would make ESG integration easier, since the ESG data is currently in an early phase, ie, it is not comparable, not all companies are reporting on ESG matters and it is not assured. However, current developments are encouraging, eg, Moody’s acquisition of [ESG data provider] Vigeo Eiris and the new EU regulation will strengthen the importance of good quality ESG data.”
However, Lundström feels investors do not always need to go to new funds to get more ESG.
“We at Evli have been integrating ESG criteria into corporate bonds’ investment process for a long time, and therefore it would not require new funds in order to have a solid ESG process. We are continuously developing our ESG approach, and for example just launched separate climate change principles.
“Of course, when launching totally new funds, it is easier to bring new developments in ESG into the funds. However, as ESG is evolving quickly and in both cases it is likely that you will have to update your process constantly.”
“Due to ‘greenwashing’, investors will have more confidence in, for example, Green Bonds’ ETFs, since all bonds in their portfolios are according to an international”
Luis Hernández Guijarro, Esfera Capital Gestión
Thomas Metzger, head of Asset Management, Bankhaus Bauer, Aktiengesellschaft Privatbank, says growing investor interest in solutions that incorporate ESG into investment policies means there is likely to be a corresponding increase in products.
Yet, the starting base remains relatively small still, and there are still questions about to what extent ESG, even built into the investment process, meets the needs of the end investor.
“I think that the share of sustainable investment funds in Germany does not even make up 5% of the total market. The trend, however, to extend the magic triangle of investment consisting of return, risk and liquidity by the sustainability aspect, is clear. Institutional investors, in part, are transforming their entire investment process and worrying about how sustainable investing in the different asset classes can work.
“Due to demand, the number of new products will certainly rise in the future. The problem with standardised solutions such as ETFs, however, is that the understanding of the individual investor from a sustainable investment angle is sometimes met inadequately.
“Since there is no universal definition of ‘sustainable investing’, when investing in a standardised approach, such as a mutual fund, investors will often encounter a variety of interpretations of the theme. Because when it comes to circulation, the product provider defines what sustainable investing means in his view.”
Metzger continues: “The integration of sustainability factors, such as the use of exclusion criteria, with the help of which, for example, securities from certain sectors are banned from the portfolio, or the application of the so-called best-in-class approach, in which in each case the ‘most sustainable’ companies in an industry or group is invested, so it cannot be directly influenced by the investor.
“Investors often have to make compromises with smaller investment amounts – which, however, want to leave the management of the investments to the wealth expert or fund manager but do not achieve the high initial sums for an individual special fund. Their view of sustainable investing will generally not be fully consistent with the approach of a standardised mutual fund.”
Does it make a difference whether an ETF is passive or active when pursuing activist ESG engagement with companies?
Danilo Pone, CIO at ENPAB, the Italian pension fund for Biological Sciences, points to regulation as a key driver of how ETFs may meet investors’ sustainability demands.
“The impending deadline of 10 June of this year on which all member states of the European Union must implement Directive 2017/828 on ‘encouraging the long-term commitment of shareholders’ looms. Under this Directive, subscribers to an ETF will know the degree of involvement of managers in the governance of those companies in their portfolio while also an investment vehicle must disclose their voting policies and various activities at shareholder meetings. These rules will increase the information obligations of ETFs on the one hand, for example; on the other hand, they will increase the involvement or engagement of investors in a company’s life.
“ESG factors are increasingly a part of portfolio selection and PMs are increasingly aware of these aspects, as are their individual component investors. One might anticipate capital outflows from those corporate strategies which are less sensitive to modern ESG methods, models and reporting.”
Like Metzger, Pone expects a “surge” in the number of new investment strategies in the ESG or SRI arena. It can be sometimes easier to launch a new product that meets investor demands for ESG than to change an existing one, but not necessarily.
“I think a new fund may prefer vehicles that incorporate ESG, but let us not forget that there are already many assets under management and these will need to be re-packaged and re-structured over time.
“We have already seen some major European sovereign wealth and pension funds roll into ESG friendly assets over a period of multiple years. It is a process and will certainly change selection preference, but little in terms of methods. V
“erification of real and effective ESG remains a major challenge for investors and will drive the selection of the investments.”
Fernando Aguado, investments director at Fonditel sees existing ETFs facing regulatory headwinds, but that this may be more to do with concerns around liquidity rather than implementing ESG per se.
Luis Hernández Guijarro, ESG fund selector and fund of funds manager at Esfera Capital Gestión SGIIC, points to particular regulatory developments affecting ETFs linked to the EU Action Plan for Financing Sustainable Growth and the High-Level Expert Group (HLEG) on Sustainable Finance.
“Of course, due to ‘greenwashing’, investors will have more confidence in, for example, Green Bonds’ ETFs, since all bonds in their portfolios are according to an international standard such as the Climate Bonds Initiative. That is the case of Lyxor Green Bonds, which have a green bond certificate from a third party, a prestigious company and expert in this field like Vigeo-Eiris.
“At the same time, there are metrics for ETFs such as the Carbon Risk Score from Morningstar to help investors to evaluate funds´ carbon risk exposure and how to contribute to the decarbonisation of their investment portfolios.”
Dirk Söhnholz, CEO of Diversifikator, sees new regulation could result in an amended view of exclusion lists: “We expect that new regulation may have an impact on existing responsible ETFs.
“It is possible, that exclusion lists will be defined which extend the exclusions currently used. Also, in the future exclusions may have to be complete exclusions and sales up to 35% in ‘excluded’ segments will not be allowed anymore. In addition, we hope that regulation will require to measure E, S and G separately so that good corporate governance cannot compensate bad social or ecological behaviour.
“Investors may, for example, require that ETFs not only consider direct CO2 emissions but emissions by suppliers and/or other air, water or land pollution as well.”
Like others, Söhnholz notes the risk that a plethora of new ETFs may come to market as a result of changing attitudes to ESG.
“As soon as private investors understand that responsible investing does not require compromises in performance, they should invest only in responsible ETFs. That would lead to a surge in new responsible ETFs.”
Equinox for ESG equities
What ESG's move into the mainstream means for equity and commodity investments going forward
Equinox for ESG equities
With increasing evidence that ESG is going mainstream, Jonathan Boyd, Ridhima Sharma, Eugenia Jiménez and Elisabeth Reyes have sought out industry views on what this means for equity and commodity investments going forward
Following on from the recent ESG Summit Zurich 2019, hosted in the Swiss city in mid-June, InvestmentEurope has canvassed further industry views on the outlook for equity and commodity based investments made through funds. Among other questions, this has sought to elicit insight into how responsible investment criteria can be maintained and how to deal with existing funds depending on regulatory developments linked to sustainability objectives.
Jerry Thomas, head of global equities, Sarasin & Partners references the first step as defining what ‘responsible’ means: for his firm it is consideration of both ESG factors and more traditional ethical concerns – steered by the status of being a charity manager. This then leads to considerations of the impact of regulation on existing equity funds.
“It is important to distinguish between fund-specific regulation and regulations that may affect investment returns.
“There is a vast swathe of new ESG-related regulation coming from the UK government’s Department for Work and Pensions, the UK’s Financial Conduct Authority, the EU, EC and the European Securities and Markets Authority, as well as national laws and guidelines and principles from the UN and OECD. To the extent that fund managers need to become aware of these and manage the consequences, there may be headwinds.
However, the essence is to encourage awareness of potential investment risks rather than to constrain.
“On the other hand, regulations to limit climate change, plastic pollution, biodiversity loss etc, will have a material impact on the profits currently generated by many companies that do not take account of such negative externalities. Certain existing funds that aren’t aware of these regulatory threats may face headwinds or indeed losses.”
Bård Bringedal chief investment officer – Equities at Storebrand, highlights sustainability as part of the investment process for more than 25 years at the Norwegian financial group.
“We apply an extensive exclusion list to all products specifying which companies we do not invest in, based on their business practices, or the products or services they provide. We have developed an in-house ESG rating for all companies within our investment universe and the data provides valuable insight to the PMs on, for example, how we view a company’s contribution to solving the UN’s Sustainable Development Goals (SDGs). Finally, we use our aggregate ownership across all investment products to influence companies in ways we consider to be in the best interest of both shareholders and other stakeholders.
“We do not currently manage commodity funds, but we would treat them like we treat any other fund, independent of asset class. Both our private equity and real estate products adhere to the same strict sustainability policies as the more liquid assets we manage; we will abstain from certain investments as well as allocate to sustainable companies or projects.”
“Exploiting natural resources is an activity with a lot of complex angles that add difficulty to accomplish ESG criteria”
Cipriano Sancho, Santander Asset Management
Looking ahead, he sees an increased awareness of climate change as well as the need to direct capital towards climate solutions.
“In the Nordics, we have seen growing interest in ESG-enhanced investment products, such as fossil-free or low-carbon funds, or those focused on investing in companies providing solutions to the SDGs through the products or services they provide.
“As investors increasingly embed these investment principles into their investment objectives, some products will not be eligible and will therefore face headwinds from lack of demand,” he adds.
Corrado Gaudenzi, head of Long Term Sustainable Strategies, Eurizon, echoes Bringedal, noting that “we already see a shift in investor preferences for products that explicitly deal with climate change risk management”.
Raphael Pitoun, portfolio manager, CQS New City Equity, cites particular parameters in determining investments.
“First, ESG needs to be part of the investment process.
“Second, there needs to be internal knowledge and expertise.
“Third, there must be an impact on the portfolio, meaning the implementation of the process is effective in making the portfolio responsible.
He adds: “That being said, there are different ways to implement this process. Our own objective is purely financial, utilising a disciplined approach to look at the long-term risks and opportunities posed by ESG factors.”
A RAPID ADVANCE
Masja Zandbergen, head of ESG integration, Robeco says there is no one-size-fits-all approach to sustainability. The manager uses “internationally accepted codes and principles to guide our own policies”.
“The UN Global Compact Principles, the Paris Climate accord, the Principles for Responsible Investment and the UN Sustainable Development Goals are important guidelines for us.
“Regulation and demand for sustainability investing are both increasing at a rapid pace. Asset managers that have not kept track with these developments need to catch up.
“Flows to sustainable funds have been larger than flows to regular funds and flows to sustainable index solutions have grown even faster. This trend has already been going on for some years. Further regulatory development will increase that trend, I believe.
“Currently the industry is reading through the 400 page report from the Technical Expert Group of the EU. Good that there is a green taxonomy.
Is equity the easiest asset class through which to pursue ESG/Sustainability objectives?
Now it remains to be seen how it will be used and of course if it can be expanded to include social issues as well. This could be an important determinant of the fate of (sustainable) investment funds in Europe.”
In the meantime, Zandbergen does see many new funds developing, including their own that are aligned with the SDGs, in both equity and credit.
Hendrik-Jan Boer, head of Sustainable Equity Investments at NN Investment Partners, is another who sees opportunity in launching new equity funds – versus changing the investment process of existing such funds.
“At NN Investment Partners we are performing both. As standards on ESG aspects have been substantially increased through the years, processes and methodologies continue to be enhanced in existing funds, while we also want to show leadership by introducing additional innovations and extensions of our offerings.
“Our experience is that success in both very much goes hand in hand. It is not that one is easier than the other but rather that drivers for both are complementary.”
David García Rubio, head of ESG at Santander Asset Management outlines his company’s approach, noting that it “analyses the ESG performance of around 3,000 companies through the study of more than 80 indicators in the three areas of sustainability (environmental, social and corporate governance)”.
“This rating is the basis for identifying companies that are committed and have a good performance in their ESG responsibilities, and companies with businesses that have a positive impact on the environment and/or society.”
In the area of commodities, it is also careful not to engage in commodity futures that are based on food commodities, to help avoid speculative transactions contributing to price inflation in food commodities.
Like other commentators, Rubio sees related regulatory developments ahead, which in the case of the EU is linked to the Action Plan on Sustainable Finance.
“It is expected that the consideration of ESG criteria in investment decision-making processes will increase as an element of risk management and as a response to an increase in demand for this type of products and a decrease in the demand of traditional ones. The consideration of ESG criteria in equity funds presents some difficulties such as the availability of quality data about companies’ ESG practices and the lack of standardisation and transparency in ESG reporting and scoring.”
“Regulation and demand for sustainability investing are both increasing at a rapid pace. Asset managers that have not kept track with these developments need to catch up”
Masja Zandbergen, Robeco
Kasper Elmgreen, head of equities at Amundi, says: “Investors are increasingly embracing ESG. This is clear speaking with investors, and it is also evident looking at flows in Europe. I believe this shift in demand toward ESG is structural in nature. Clearly as new areas are embraced, there could be a trend against areas that are not sustainable from an ESG perspective.”
Elmgreen adds that there is evidence of an increasing number of equity funds addressing facets of ESG, tackling “explicit ESG integration/engagement/impact angles, as well as equity funds seeking to address some or all of the SGDs.
“These areas will only grow in my view.”
Sandra Crowl, head of stewardship at Carmignac, notes that: “The EU strongly supports the transition to a low-carbon and sustainable economy and the European Commission in particular has launched an ambitious drive to request all asset manager groups to show they are integrating sustainability risks in their investment process and if not, why not.
“The EU Commission has proposed amendments to Mifid 2 to include ESG considerations into the information that all investment advisors need to obtain from clients. If you market your fund with either Environmental or Social characteristics then it has to be in your prospectus.
“Fund management companies therefore will face headwinds if they do not believe in the benefits of ESG due diligence for the simple reason that they will have to implement them.”
Regulation is one of three main drivers of investor demand in favour of ESG, Crowl continues, but there are others, such as owners and managers of assets sending strong signals to corporates that if they don’t behave sustainably, they will be punished financially.
Another driver has to do with changing perceptions amongst customers and retail investors, for example, Millennials inheriting wealth from Baby Boomers and expressing strong ethical investment preferences.”
Crowl too sees growth in the number of equity and/or commodity funds, seekig to address the demand.
Jean-Louis Scandella, CIO equities, Ostrum AM, notes that while many claim to be sensitive to ESG, there is still great dispersion in the practical implementation.
“Our clients invest in equity funds in order to save for their pension funds or their children’s education. We do not put their savings at risks just for the sake of ticking ESG boxes. Of course, our clients want good returns without polluting the planet and want no connection to companies taking liberties with the environment. We are following PRI texts not just to be present in the market but above all on a moral basis.”
Cipriano Sancho, absolute return funds analyst at Santander Asset Management, says that climate change concerns and the transition to a carbon-free economy are going to provide support to equities that are aligned with these goals.
“Increased volume of ESG driven investments will drive capital to such stocks, and those companies that are detrimental to these goals will have fewer opportunities to access capital.
“In the commodity space there are similar considerations to take into account. The level of production and liquidity are taken into account to build commodity future indexes. Not only is the level off production important to determine index weightings: trading volume has an influence as well.
“Having said that, the most important drivers in commodities are supply/demand factors, which are directly linked to the economic trends and environment, among others. Social and environmental measures could prompt a strong shift in supply/demand channels without any doubt. Indeed, you have a good example in industrial metals like platinum and palladium, the former presenting a demand totally dented due to the catalytic converters scandal in diesel vehicles, and the latter benefiting from the increase in demand for gasoline engines.”
On the question of new funds meeting new investor demand in this space, he suggests that in the equity space there is already a range of options for investing in companies aligned with the SDG goals and fighting climate change.
“Our Santander Sostenible range can invest in such strategies. In the case of commodities, the issue is trickier. Exploiting natural resources is an activity with a lot of complex angles that add difficulty to accomplish ESG criteria. Nowadays miners are doing their best to improve sustainability factors, especially those with stronger balance sheets, and the market will likely reward those who succeed in doing this.”
“Our clients want good returns without polluting the planet and want no connection to companies taking liberties with the environment”
Jean-Louis Scandella, Ostrum AM
On commodities, he says: “The nature of commodity markets has always placed challenges in terms of regulatory requirements. Investors can access to this market through index funds, commodity funds or commodity futures. Risks associated with the asset class have been a constant source of worries for regulators in order to protect the final investor. Minimum diversification requirements or the ban of physical delivery in the Ucits space have forced investment managers to implement strategies through swaps. There have previously been intentions to review the adequacy of these kind of practices in the industry, and maybe this will be revisited to increase client protection.”
Gorka Apodaca, portfolio manager and fund selector at MoraBanc, agrees that “the regulatory environment is evolving, for example, as governments react to the power of tech companies to collect information. And where there is a more conscious mindset about then environment, this could lead governments to apply more restrictive laws on companies, such as commodities companies, to pursue and reach sustainability goals”.
“New regulation could increase capital cost, but that said, companies capable of adapting their models will have an opportunity to be on the radar of funds that focus on sustainable and eco-friendly companies. There is an increasing demand for the likes of carbon neutral funds, or those promoting solutions to the SDGs, Apodaca agrees.
“In northern Europe, the implementation of this type of investment is at an advanced stage compared to that of southern European countries. However, given the regulations will be more restrictive with the implementation of ESG and SRI criteria, the interest for the launch of this type of funds adhering sustainable and socially responsible principles will increase too. Everyone wants a piece of the pie.”
Dirk Söhnholz, CEO, Diversifikator, notes that because his firm only uses passive investment funds and direct equities, the selection process starts with the relevant index.
“The stricter the responsible index, the better. Therefore, we prefer concentrated indices and funds. Unfortunately, even the strictest responsible indices for which investment funds are available, often tolerate sales in ‘excluded’ market segments and do not use separate ratings for E, S and G. Thus, good governance can compensate bad ecological or social ratings.”
For commodities funds, he looks to commodity-stock indices rather than commodity derivative-indices.
Will commodity funds have to tighten their parameters of acceptable governance when engaging with mining companies?
“We expect funds in general, including commodity funds, to focus more on ‘responsible’ components in the future. Future regulation will hopefully bring more transparency and thus increase the pressure on funds to become more ‘responsible’, howsoever defined.”
In future, he adds, where two commodity funds are otherwise similar, the more responsible one will have a much higher likelihood of being selected. Although, for now, he remains sceptical about equity or commodity funds trying to focus on impact or SDGs.
“Public equities focus on profits first. Current public equity offerings with the labels ‘impact’ or ‘SDG’ often include stocks which no serious investors would classify as classical impact investments. The MSCI Impact Index for example includes Danone and Procter and Gamble. Greenwashing attempts are a serious issue.
“I see many opportunities for equity funds applying strict responsibility criteria across any investment universe. In Germany, investors can chose from almost 2,000 ETFs – less than 100 can be considered as ‘responsible’. As soon as investors understand that responsible investing does not require compromising performance, they should invest only in responsible ETFs or low-cost portfolios.
“That would lead to a surge in new responsible investments.”
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