SRI/ESG/Sustainability Supplement 2018
SRI/ESG/Sustainability Supplement 2018
Building a better future
Equities • Fixed income • Challenges
Most of the world’s biggest asset managers have committed themselves to heeding environmental, social and governance factors
The application of ESG factors into mainstream investment approaches continues to gather pace
Regulatory changes and demand from investors are driving the market for ESG fixed income products
How the asset management industry is scaling up to confront problems of a global nature
InvestmentEurope’s 2018 programme of events consider multiple aspects of SRI and ESG throughout 2018
Identifying key structural growth trends
ESG: The future begins today
Trillions of reasons
“Most of the world’s biggest asset managers have committed themselves to heeding environmental, social and governance factors”
– Jonathan Boyd, InvestmentEurope editor and
editorial director of Open Door Media
Trillions of reasons
There are several collective investment vehicles available today that have been going for over a century. During all this time, their chief concern has been to generate returns on behalf of investors without regard to what are euphemistically called externalities.
However, much has changed over the course of the last century, not least the development of the means to measure the impact that human activity is having on the planet, and in turn, the impact on investment opportunities and challenges going forward.
Even just a couple of decades ago it would have been difficult to launch or manage a fund that relied on an investment process analysing and quantifying the effects of, say, carbon emissions on investment decisions. Data and the skills to analyse them were still patchy.
Today’s investment universe has come a long way since then, and even further still from the early decades of the 20th Century. Now, most of the world’s biggest asset managers have committed themselves to heeding environmental, social and governance factors, while governments have committed themselves – and the fund industry – to targets that fundamentally challenge age-old preconceptions of risk. Collectively, this affects many trillions of dollars/euros/pounds/yen and so on of investments, and represents a challenge, but also opportunity for both active and passive managers.
A stronger following
A stronger following
The application of ESG factors into mainstream investment approaches continues to gather pace across both active and passive equity strategies, as Cherry Reynard finds out
The buzz around sustainable investment has continued to grow, with those investment managers who have stolen a march on their peers keen to shout about their green credentials. To date, laggards have been under no compulsion to change, but that may be able to change. Under new proposals announced by the European Commission, all asset managers may be forced to consider environmental, social and governance issues as part of their investment process. It is one step closer to bringing ESG considerations into the mainstream.
In its announcement the European Commission said EU regulation in this area is “neither sufficiently clear nor consistent across sectors”. It added that it would “set out a roadmap” to boost the role of finance in achieving a “well-performing economy that delivers on environmental and social goals”.
This all sounds good in theory, but it is not yet entirely clear what this will mean in practice. The proposal has met a lukewarm reaction from the European Securities and Markets Authority, which said that while it supported the general direction of the Commission’s proposals, it risked turning ESG considerations into a ‘tick box’ exercise. It concluded: “consideration of sustainability objectives has to be driven by asset owners”.
If the Commission were to come into the picture, it would add to the existing pressure on asset managers to integrate ESG considerations.
There is mounting pressure from clients acknowledges Peter Ferket, head of investments at Robeco: “We see it more and more among our clients. Some major European pension funds – PGGM, ABP – we believe more asset managers will need to follow this. While there are less than a handful at the moment, there will be more.”
“Companies can’t operate in isolation – what they do, how they treat their employees, how they are governed, it’s all part of being a well-managed company”
Amanda Young, Aberdeen Standard Investments
This ‘people pressure’ was illustrated over the past year by the Edelman Earned Brand report. The communications group’s survey of 14,000 people in 14 countries suggested three-quarters of investors feel that companies have an obligation to take a public stand on social issues that are important to their business environment. It matters to businesses because it matters to consumers – 57% of consumers around the world buy or boycott based on the positions they take on such issues, the report suggested. A recent example is the stance seen evolving among stakeholders – consumers and investors - in the US involving the National Rifle Association in respect of yet another school shooting.
Investment managers, if anything, are still behind their clients and the wider public. The Edelman analysis showed that only 28% of the investment professionals surveyed agree that ESG risk management is an important factor when considering investing (although one in three are now more attentive to ESG risks).
That said, there is increasing momentum. There are some companies – Hermes Investment Management, for example – that have long integrated ESG considerations across all their funds, but this is spreading. Robeco, for example, recently moved to exclude tobacco stocks from all its portfolios, rather than just its specific ‘ethical’ range. This was the first time it had excluded a topic from its mainstream fund range. Ferket says the key concern was the removal of tobacco companies from the UN Global Compact in July of last year. However, at the same time, clients were increasingly demanding tobacco’s exclusion.
ENCOURAGING GOOD BEHAVIOUR
UK headquartered M&G is in the process of integrating its ESG strategy into its mainstream funds, mostly focused on engagement and voting. This will incorporate all ‘non-financial factors’, including governance, social and environmental factors. The group is increasingly using its position as an active fund manager to influence companies and encourage good behaviour.
Of course, there are challenges associated with building an ESG capability, particularly the variability of what investors consider important or ‘ethical’. Ferket admits that while clients are becoming increasingly vocal on sustainability issues, these will vary from country to country and, as such, are not always easy to accommodate in a single investment strategy.
“Excluding companies doesn’t tend to add to performance, but we run actively managed portfolios of 40-100 companies out of a universe of 2,000, so excluding 20 companies won’t have a significant impact”
Peter Ferket, Robeco
“Many large pension funds exclude tobacco already. There will be differences in the view on firearms for North and South America and part of Asia,” he adds.
Amanda Young, head of responsible investment at Aberdeen Standard Investments, says: “The fundamental starting point is that companies can’t operate in isolation – what they do, how they treat their employees, how they are governed, it’s all part of being a well-managed company.
“But how you apply ESG can vary quite considerably. Clients want more ethically-based products, where they have an issue with the products or services the company are making; we have clients who want much more focus on delivering solutions to the world’s problems, and we have a lot of clients concerned about climate change, but have different approaches – it may be exclusionary or understanding how companies are working to a lower carbon economy.”
There are still, of course, investors who consider that incorporating ESG criteria, or even exclusion, necessarily results in a weaker investment performance.
Ferket says: “Excluding companies doesn’t tend to add to performance, but we run actively managed portfolios of 40-100 companies out of a universe of 2,000, so excluding 20 companies won’t have a significant impact.”
That said, studies increasingly show that some aspects of governance actively contribute to returns.
A recent report by MSCI, for example, showed that companies with diversity at board level had higher average return on equity than those without. Exchange traded fund providers UBS, State Street Global Advisors and Lyxor have all launched gender equality ETFs on the basis that companies that promote equality tend to outperform.
Of course, different exclusions will impact differently on performance. A big challenge in 2017 was the outperformance of the ‘FANG’ stocks. The large technology names of Facebook, Amazon, Netflix and Google (Alphabet) have tended to have relatively poor governance records, and yet led markets higher over the past year. Nevertheless, over time, it may be that the more investors that are looking at governance or ethical criteria, the fewer buyers there will be for poorly run companies. That means not paying attention to ethical criteria will have an increasingly large impact on shareholder returns.
The problem with this thesis is the influence of passive products. To date, ESG has largely been associated with active investors. If anything, it has been a key selling point for active funds at a time when they are otherwise losing market share to passive. However, passives have started to muscle into the sustainability arena as well. This has been ‘push’ rather than ‘pull’. The largest passive investors are often among the top names on a company’s shareholder register and there have been increasing concerns about their lack of scrutiny.
This has prompted many to act. For example, in the wake of a recent, and much publicised, school shooting in Florida, BlackRock said it would ask gunmakers and gun retailers held in its passive products whether they are adequately managing the risks associated with their products. It said it was also looking at launching new funds that exclude firearms. “We believe that this event requires response and action from a wide range of entities across both the public and private sectors,” the manager said in a statement.
This has been relatively piecemeal to date, but pressure is mounting on asset managers across the board to factor ESG criteria into their investment decision-making. With Esma poised to get involved, asset managers without a strategy in place may find themselves behind the curve. If poor governance starts to have an increasingly influence on shareholder returns, they may find themselves lagging the peers on performance as well.
Identifying key structural growth trends
Companies which improve quality of life, make best use of scarce resources and help build a stable economy will thrive in the future
Peter Michaelis, head of Sustainable Investment, Liontrust
Identifying key structural growth trends
In a fast changing world, we believe the companies that will survive and thrive are those which:
- Improve people’s quality of life, be it through medical, technological or educational advances
- Drive improvements in the efficiency with which we use increasingly scarce resources
- Help to build a more stable, resilient and prosperous economy.
Our investment process, which has been developed and honed over more than 15 years, starts with a thematic approach in identifying
the key structural growth trends that will shape the global economy of the future and then
invests in well run companies whose
products and operations capitalise on these transformative changes and, therefore, may benefit financially.
Our team, who have worked together for more than 10 years, invests in three transformative trends and 22 themes within these trends. Our investment approach is one of full integration of Environmental, Social and Governance (ESG) issues into investment decisions. We do not have separate fund management and ESG teams; instead every investment team member is responsible for all aspects of financial and ESG factors relating to the investment decision.
Here is a summary of three of our themes.
ROAD TO PROSPERITY
What is the number one cause of mortality for 15 to 29-year-olds around the world? It may surprise you to learn it is road traffic accidents. According to the World Health Organisation, there are 1.3 million deaths on the roads every year, which equates to 3,500 a day.
The United Nations – as part of its Sustainable Development Goals and Decade of Action for Road Safety 2011-2020 – has targets to halve the number of deaths and injuries from road traffic accidents by 2020.
The most interesting growth for investors is likely to come from Active Safety systems, which are bringing down injury rates through incident avoidance and crash protection. These are based on electronic technologies including sensors and response mechanisms in steering and braking.
A major player in the smart mobility market is French company Valeo, which offers one of the largest ranges of smart sensors and features for enhanced automated driving systems. It markets itself as offering smart technology for smarter cars.
The consumption of calorie-dense food and lower levels of physical activity have led to a global obesity epidemic, tripling since 1975 and set to rise further still. The World Health Organisation (WHO), for example, projects that by 2030 more than one billion adults around the world will be obese.
“Well-run companies whose products and operations capitalise on structural changes can benefit financially and we believe identifying these powerful trends and investing in relevant businesses can make for attractive and sustainable investments”
Peter Michaelis, head of Sustainable Investment, Liontrust
People are increasingly aware that the food we consume needs to better fit our lifestyles, with more natural and healthy characteristics. Legislation reflects a more proactive approach from governments as well, with sugar taxes being implemented across the globe.
One of our key long-term holdings is Irish-based food technology company Kerry Group. Food manufacturers and hospitality companies come to Kerry for its expertise in ingredients and flavourings. Kerry enables what it calls the “Three Rs”: reduce, remove and replace. For example, this includes reducing calories, removing artificial chemicals and replacing them with natural alternatives. We also like Kerry because it is managed for the long term and consistently invests in research and development to maintain leadership in the food technology space.
BANKING ON RETURNS
At its core, banking can and should be a profitable business that can drive shareholder returns by doing right by its customers.
We favour retail banks and search within them for cultures of driving growth in revenues and expansions of margin through the positive treatment of employees and customers. We look for a focus on customer outcomes over the long term rather than short-term sales volumes.
We also look for employee training and development that has treating customers fairly at its core. In the long run, we believe a strong employee culture is critical to delivering customer focused behaviours, which is critical to delivering consistent financial outperformance.
Management is another key issue for us and we look for banks with a clear strategy to align the interests of management with those of customers and shareholders.
A bank’s reputation can be integral to driving top-line growth and deposits, while being ahead of regulatory requirements should be rewarding over the longer term.
DNB is an example of a bank we have long rated highly. It has a strong focus on investing in the real economy with a large and growing exposure to retail banking and lending to small and medium sized enterprises.
It is a high-quality bank that has consistently delivered returns on equity above its cost of capital. Against the backdrop of a relatively strict Norwegian regulator, DNB is also one of the least levered banks in Europe.
Well-run companies whose products and operations capitalise on structural changes can benefit financially and we believe identifying these powerful trends and investing in relevant businesses can make for attractive and sustainable investments.
Key Risks: Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital.
Disclaimer: Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business. This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing. 18/186
New horizons for growth
New horizons for growth
The market for environmental, social or governance fixed income products is set for exponential growth, driven by both regulatory changes and demand from investors Lukas Sustala reports
Environmental, social or governance concerns have grown significantly in prominence. As investors increasingly focus on the impact of their investments, they demand more data and transparency.
The change is palpable. For many investors in their portfolios, for asset managers, for analysts. ESG criteria are on the rise, as fund companies rush to relabel and change existing products into “sustainables” or start new thematic strategies. It is not just the reshuffle of single products, but the creation of new teams and strategies to cope with the rising demand of aware investors, that attract more and more attention.
Ali Masarwah of Morningstar Germany recently called sustainable investing according to some ESG criteria “the order of the day” for the investment management industry.
Given that regulators in the European Union are moving to set up standards for the industry, fund companies might be eager to be even quicker creating their own approaches to ESG investing and creating “early mover” advantages.
“This asset class is especially interesting for investors who want to have a positive impact”
Matt Christensen, AXA IM
ROOM TO GROW
One area of growth in sustainable investing is the fixed income market.
According to the annual report of the Forum Nachhaltige Geldanlagen, equities still account for the largest chunk of the allocation of sustainably invested assets in Germany. The “equities tilt” within the space of socially responsible investing makes sense, because some approaches to ESG – such as company engagement – requires an investor to be a shareholder and not just a debt holder.
But growth in fixed income is significantly higher than for the asset class of equities in the DACH region (Germany, Austria, Switzerland) the FNG data show. In 2016 the pace of growth in the German sustainable bond market was 21%, twice the growth rate of property investments and seven times that of equity allocations.
Corporate bonds are a particular area of interest. A number of fund companies quizzed by Investment Europe in Frankfurt and Vienna indicated that new fixed income products invested in assets such as green bonds are in the pipeline.
One of the strongest trends in this regard has been the recognition that ESG criteria might not just be about an investor’s preferences, but also about the prudent management of investment risks.
For bonds especially, ESG criteria can add significant value when assessing credit quality and give hints to future risks, says Matt Christensen, AXA Investment Management global head of Responsible Investment. The insurance group and its manager have been among the early adopters of ESG criteria for bond investments.
Christensen explains that green bonds offer a unique set of characteristics for socially aware investors: “This asset class is especially interesting for investors who want to have a positive impact.”
As noted by AXA IM, “the green bond market is in growth mode”.
For a market that started to grow just in 2012, issuance has risen to a healthy $155bn as of 2017 – up three-fold since 2015. And expectations going forward are even higher. Issuance could top $250bn, analysis from the Climate Bonds Initiative suggests.
AXA, the insurance group parent of AXA IM, is among a number of European insurers and reinsurers, such as Swiss Re and Allianz, that have committed to sustainable investment approaches and driven the market further.
Swiss Re announced in 2017 that it would shift its $130bn investment portfolio to ESG benchmarks. Allianz has adopted an ESG framework for underwriting, claims, investment management and asset management.
Steffen Hörter, global head of ESG at Allianz Global Investors, and his team have looked at various asset classes through the ESG lens to answer the question whether ESG for an investor offers “Mehrwert oder Marketing” – added value or just good marketing.
Their findings are clear: in a recent study on sovereign debt, Hörter concluded that better ESG scores were reflected in lower sovereign debt insurance costs. In a white paper on corporate debt Hörter concluded that it would be optimal for fixed income investors to both avoid companies with material ESG risks and invest in “ESG momentum”, ie, companies that are about to improve on their scores.
SUSTAINABILITY – A CORE CONCERN
The most important fixed income asset class for the traditional insurer or institutional investor remains government bonds.
Sovereign debt is often cited as the most difficult to assess via ESG criteria, because they do not involve assessing a particular project (like with a green bond) or a particular company.
Lupin Rahman, head of EM Sovereign Credit at investment manager Pimco, wrote recently in a note that ESG criteria have a lot to say about the credit risk in sovereign debt.
“Variables related to governance have been found to be effective indicators of sovereign credit risk, particularly in countries at the lower end of the ratings scale where governance and the quality of institutions can be binding constraints.”
Indeed, studies by rating agencies have found time and again that sovereign defaults and governance defects correlate strongly with one another. Having a clear analytical framework for governance might thus be a key quality of fixed income analysis.
Erste Asset Management, Austria’s largest asset manager by assets, has been an early adopter of sustainability and already manages roughly €5bn, or a seventh of total assets, in ESG products.
Its “Responsible” line-up includes a number of fixed income products, such as corporate bond strategies as well as EM corporate bonds, green and social bonds, and microfinance.
Gerold Permoser, both chief investment officer (CIO) and chief sustainable investment officer (CSIO) at Erste, is certain that “responsible investing will grow more and more in importance”.
In the DACH region, the average annual growth for sustainable investment products has been a healthy 40% since 2014, according to data from the Forum Nachhaltige Geldanlagen. And Permoser is sure that active managers can add value by using an ESG framework. For example, he cites the launch of a “Responsible” version of the emerging markets corporate debt strategy as linked to corruption or environmental risks that can be mitigated by screening for ESG criteria.
The challenges for asset managers thus are clear: despite the lure of profits when shifting towards ESG products, a transparent process is key.
Allocating to criteria of environmental, social or governance concerns is more than just an “investment style” like value versus growth or a universe choice like corporate versus sovereign debt.
It is a wide-ranging decision that affects everything from portfolio analysis to marketing to data management and client relationship management. Regulators might soon set standards defining ESG, but it will still be necessary to have a trustworthy process.
ESG: The future begins today
A big step forward in sustainable investing
ESG: The future begins today
Ethical and sustainable now accounts for what we believe to
be the fastest growing segment of the investment industry
Between 2012 and 2016, sustainable assets under management grew 64%*, from USD 14 trillion to USD 23 trillion. It is no longer a desirable “add-on” to an investor’s portfolio, but a central investment strategy that can offer data-driven insights to evaluate investee companies.
Sustainable investing (“SI”) marks one of the most significant investment advances of the 21st century. SI’s transparency offers investors an opportunity to build strong portfolios which can generate better, and more sustainable returns. There is an outdated view that there can be a trade-off between SI and financial performance, but indications are that this is simply not true.
The impact of this trend on the investment community is reflected by the UN Principles for Responsible Investment, with over 1,500 institutions across 50 countries as signatories, representing over USD 62 trillion in invested assets.
Transparency is key, and ESG metrics can give investors quantitative insight into how well a business is run, where the real risks lie, and how sustainable its business models and practices really are.
Embedding these metrics into the investment decision process can be a useful investment tool that also offers a forward-looking perspective. It can offer insight into the qualitative aspects of a business, both positive and negative, which may influence decisions and perceptions that ultimately impacts a business’ bottom line.
SI broadens the use of material data in the investment analysis process to include ESG metrics. These can help investors take a broader view of the benefits and drawbacks of their investments, enabling them to make better decisions. Investing according to ESG criteria does not harm returns, but actually strengthens portfolios by lowering the cost of capital.
Regulatory and reputational risk can also be mitigated by adhering to ESG criteria, as regulators are now insisting on greater openness around ESG matters and policies.
Today, SI embraces the adoption of positive screening. The newest category of SI aims to go even further, by investing sustainably and measuring the resulting impact on critical environmental and social challenges. There has been a rapid expansion in both the quality and quantity of sustainability information that has been disclosed by companies. This allows investors to take a systematic approach to investing in companies based on their actual financial valuation, as well as ESG considerations.
The increase in transparency has also prompted more academic and institutional research into the consequences of portfolio returns. Research suggests that sustainably run companies actually perform better over the long term, so it is crucial that investors find a way of integrating this information into their evaluations.
The broader SI shift is likely to gather pace as it remains high on the agenda for the next generation of investors. 69% of Ultra High Net Worth Millennials say they are interested, or very interested in socially responsible investing, according to Campden Wealth's 2015 UHNW Millennials Research report.
For UBS AM's sustainable ETFs, we are confident that SI screenings do not sacrifice returns, and for most jurisdictions even outperform the parent index. The MSCI Socially Responsible Investing indices are built upon three pillars: Environmental, Social and Governance (ESG). Based on these pillars, the SRI index selects companies using a three-step approach:
- Business Involvement Screening Research – Exclusion
Negatively screens companies with a detrimental social or environmental impact including weapons, alcohol, gambling, nuclear power, tobacco, adult entertainment and genetically modified organisms.
- ESG Intangible Value Assessment
This positively screens companies by assigning each an ESG rating from AAA to CCC, based on ESG business practices. Only the highest ESG-rated companies are eligible for the SRI index.
- ESG controversies – Scoring
Identifies companies that are involved in controversial activities, assessing how well companies adhere to international norms and principles such as the UN Global Compact and ILO Core Conventions. MSCI ESG Controversies look at five different areas: Environment, Governance, Customers, Human Rights & Community and Labour Rights & Supply Chain.
Earlier this year, UBS AM also launched a Gender Equality UCITS ETF that applies an ‘in depth screen’ ranking companies on 19 different criteria, including gender balance in leadership, equal compensation and work life balance.
This marks a big step forward in SI innovation, which is now garnering the attention it deserves.
*Source: Global Sustainable Investment Alliance, 2014 and 2016 Global Sustainable Investment Review.
Disclaimer: UBS Asset Management (UK) Ltd is a subsidiary of UBS AG. Registered in England. UBS Asset Management (UK) Ltd and UBS Asset Management Funds Ltd are authorised and regulated by the Financial Conduct Authority. UBS Asset Management Life Ltd is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Telephone calls may be recorded.
This document is for Professional Clients only. It is not to be distributed to or relied upon by Retail Clients under any circumstances.
The document has not been prepared in line with the FCA requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
The Luxembourg and Irish domiciled funds are recognised scheme under section 264 of the Financial Services and Markets Act 2000. They seek UK Reporting Fund Status. The protections offered by the UK’s regulatory system, and compensation under the Financial Services Compensation Scheme, will not be available.
The Switzerland domiciled funds are not recognised under section 264 of the Financial Services and Markets Act and are therefore subject to the restrictions on promotion in section 238 of the Financial Services and Markets Act.
The returns payable to the fund are dependent on payments received by the fund from the swap counterparty under the terms of the relevant swap and, therefore are subject to credit risk of the swap counterparty. In the event that the swap counterparty defaults under the terms of the relevant swap, the funds may suffer a loss.
This material supports the presentation(s) given. It is not intended to be read in isolation and may not provide a full explanation of all the topics that were presented and discussed. Care has been taken to ensure the accuracy of the content, but no responsibility is accepted for any errors or omissions. Please note that past performance is not a guide to the future. The value of investments and the income from them may go down as well as up, and investors may not get back the original amount invested. This document is a marketing communication. Any market or investment views expressed are not intended to be investment research.
The document has not been prepared in line with the FCA requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this document should not be considered a recommendation to purchase or sell any particular security and the opinions expressed are those of UBS Asset Management and are subject to change without notice. Furthermore, there can be no assurance that any trends described in this document will continue or that forecasts will occur because economic and market conditions change frequently. This document does not create any legal or contractual obligation with UBS Asset Management. The recipient agrees that this information shall remain strictly confidential where it relates to the Investment Manager's business. The prior consent of UBS Asset Management (UK) Ltd should be obtained prior to the disclosure of commercially sensitive information to a third party (excluding the professional advisors of the recipient). Information reasonably deemed to be commercially sensitive and obtained from UBS Asset Management (UK) Ltd should not be disclosed. This information is supplied with a reasonable expectation that it will not be made public. If you receive a request under the Freedom of Information Act 2000 for information obtained from UBS Asset Management (UK) Ltd we ask that you consult with us. We also request that any information obtained from UBS Asset Management (UK) Ltd in your possession is destroyed as soon as it is no longer required. This document may not be reproduced, redistributed or republished for any purpose without the written permission of UBS AG.
This document is issued by [UBS Asset Management (UK) Ltd] and is intended for limited distribution to the clients and associates of UBS Asset Management. Use or distribution by any other person is prohibited. Copying any part of this publication without the written permission of UBS Asset Management is prohibited. Care has been taken to ensure the accuracy of its content, but no responsibility is accepted for any errors or omissions herein.
© UBS 2018. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. E3
Scaling the response
Scaling the response
The scale of the asset management response to challenges such as global warming is starting to reflect the scale of those challenges. Jonathan Boyd highlights key developments
Agreeing common ESG standards and definitions cannot come soon enough for many investors.
Consider the UK pensions industry, where between October 2012 and July 2016 more than 206,000 employers added pension scheme members as a result of auto-enrolment law. That saw some 6.5 million workers added to the 9.5 million already in relevant workplace schemes. Pension schemes are often a source of mandates in which ESG factors figure significantly.
Meanwhile, the UK Investment Association first issued guidelines on responsible investment disclosure in 2007, updating its guidance in 2015. In other words, the UK asset management industry has had plenty of time to consider the impact of ESG factors.
Norway’s sovereign wealth fund – Pension Fund Global – reported it made a return in 2017 of over €108bn.
The fund follows a strict screening protocol based on sustainability goals. Thus, it is proven by Europe’s biggest fund that applying strict filtering while generating a return is possible.
But while Norway’s future pensioners are already well diversified across equity, fixed income and property asset classes – and possibly more private equity in future – according to strict ESG/sustainability criteria, the situation facing UK pensioners is less straightforward.
Shell, British American Tobacco and BP are the second, third and fourth ranked stocks by market capitalisation in the FTSE 100 index according to data in the runup to the March 2018 reshuffle of the index.
Meanwhile, according to Morningstar, the top dividend payer in the UK in 2017 was Shell, while BP was in the top three. Data published by the Link Asset Services UK Dividend Monitor suggest the top 15 dividend paying companies in the UK in 2017 accounted for 60% of the £94.4bn (€107bn) in dividends paid out. Clearly, running a UK equity income fund that excludes the biggest local oil companies could present a challenge, at least in the near term.
That, presumably, also must be weighted against the risk of such companies being left with orphaned assets – oil that can never be sold if the big consumers of oil stick to the Paris Agreement, through which carbon emissions will be more tightly controlled to avert the worst effects of climate change.
As noted elsewhere in this supplement, there is still a debate on to what degree investors themselves should decide what ESG factors should be applied to their investments.
This can be noticed in the news flow. A year ago, AXA IM reported its intent to divest from coal-related businesses. However, a year earlier, in 2016, when parent group AXA said it was exiting some €1.8bn of tobacco investments, its asset manager AXA IM said at the time that it would be up to the client to determine the exit.
It is clear that the asset management industry, and many of the biggest investors, are moving to ensure investments provide returns as well as meet environmental, social and governance issues, and sustainability goals.
One measure is the growth in assets committed to UN Principles for Responsible Investment.
This matter, because the first ‘Principle’ is a commitment by signatories to “incorporate ESG issues into investment analysis and decision-making processes”.
Furthermore, it is clear from other evidence why investors are committed to UN PRI, and governments have been stating that they wish to see, for example, the phasing out of the use of internal combustion engines.
Other evidence that the industry is responding comes from the growth in labelling regimes. While there is yet to be agreement on a common EU standard for labelling funds, the likes of LuxFLAG continue to add funds in areas such as ESG, where it announced recently for the first time an “ESG Label” for DPAM L Bonds Emerging Markets Sustainable, DPAM Invest B Equities Europe Sustainable, DPAM L Bonds Government Sustainable, NEF Ethical Balanced Conservative and NEF Ethical Total Return.
Another example is the announcement in October 2017 of the first Nordic Swan ecolabeled funds, representing some SEK30bn (€2.98bn) of assets.
Some of the key drivers of these trends are simply non-negotiable.
The charts above on carbon in the atmosphere and the United Nations Sustainable Development Goals are big challenges that governments have committed to overcoming, but they cannot be met without contributions from investors.
InvestmentEurope’s programme for 2018
InvestmentEurope’s programme of events through 2018 will include the participation of investment professionals discussing strategies for all aspects of SRI and ESG
Access to latest thoughts is made possible through all three types of events laid on by InvestmentEurope: Roundtables, Forums and Summits. Recent speakers have included:
Claudia Wearmouth, BMO GAM, speaking at the Milan Forum 2018
Laurent Jacquier-Laforge, CIO Equities – La Française, who discussed “Is climate change awareness gaining the upper-hand? What are the opportunities for investors?” at the Nordic Summit Stockholm 2018. (Downloadable here.) At the same event, Corrado Gaudenzi, head of Long Term Sustainable Strategies and portfolio manager at Eurizon Capital, presented “Eurizon Fund Sustainable Global Equity: how to integrate ESG considerations in our portfolio”; and Charlie Thomas, head of Strategy, Environment & Sustainability – Jupiter Asset Management outlined the topic “A changing landscape: 30 years of impact investment”.
Claudia Wearmouth, director, analyst at BMO Global Asset Management, who covered “Responsible investment in corporate bonds” at the Milan Forum 2018. (Downloadable here.)
Events set to take place over the next few months of 2018 include:
• Zurich ESG Forum on 12 April.
• Pan-European Summit Lausanne 2018 on 25-27 April.
• DACH Summit Munich 2018 on 15-16 May.
• Barcelona Roundtable 2018 on 31 May.
• Oslo Roundtable 2018 on 7 June.
• Swiss Summit 2018 on 7 June.
For further information on these or any other InvestmentEurope events visit:
There you will find information on venues, speakers and keynotes attending the portfolio of events laid on across Europe and elsewhere.
Local. Informed. Connected.
In its quest to serve the information needs of financial services professionals around the world through its digital products, publications and conferences InvestmentEurope has announced a full calendar of events for 2018 for Europe and the US Offshore market. If developing relationships with the leading fund selectors in Europe is important to your marketing and distribution strategy, click here.