Cambridge Associates – Portfolio Insight


Is this the benefit of having greater scrutiny over ESG?


There is a growing demand for ESG data, but ESG integration is not a scorecard you just tick.


The other red flag is when you have split offerings, i.e. sustainable and non-sus- tainable products. This generally signals that sustainability is not core to the invest- ment philosophy of the manager and more a way to raise assets.


If you are looking to make a sustainable impact, how would you approach public assets compared to private assets? Many clients ask us to build them an impact portfolio. Impact means making a difference, something that has intention- ality and additionality. You can achieve these objectives in private markets more than in public markets. You are providing primary capital that was not there before to a company that is not ready to list because, for example, it needs a turnaround that is long-term and does not lend itself to the quarterly snap- shots the stock market needs. In the impact portfolios that we help build for our clients, the vast majority of cli- mate or social opportunities are in private markets. It is there that your primary cap- ital can make the biggest difference. In that world you can also tailor more to the specific client needs.


There has been a backlash against ESG-led strategies. Is it justified? Yes, the backlash against ESG-led strate- gies used crudely as a way to raise assets is absolutely justified. The politicisation of ESG on the other hand, which is happening predominantly


in the United States, is unhelpful. The politicisation of anything is unhelpful because it’s polarising. The backlash, if we put aside the politici- sation of it, is absolutely justified. Because ESG has a labelling problem. It is just a badge saying: “I am good”.


I have started counting the investment managers who do not have a wind turbine on their presentation. That number is get- ting smaller and smaller, which is dis- turbing, as it has become a mechanism for raising assets. We subscribe to the idea that ESG-led strategies need to lead to a competitive advantage that can be understood. Either leading a company to have lower costs, a better product or higher revenue, whatever it might be, you need to make those links. And it will be different for each company. A generic label saying: “I am good”, has never worked.


The other point I would make, is on double materiality. It is not just about companies understanding how the world affects them, but it is also about how they affect the world. There is still a lot to be done in this area.


Have additional regulations, particularly across Europe, helped? Nobody likes regulation. It’s bureaucratic. But if you compare the data released by European companies to those in the UK and the US, the reality is that there is more disclosure. You can hate regulation, but regulation forces greater transparency. Why is that bad?


Issue 119 | December-January 2023 | portfolio institutional | 29


I welcome greater scrutiny, it encourages things to be done better. But greater scru- tiny taken out of context is unhelpful. Pulling up a singular piece of data in iso- lation to prove that a company is bad, can be very misleading.


These are long-term strategies which could be investing for decades, so how should investors keep their focus on meaningful ESG integration? This is continuously improving. Twenty years ago, we did not have the ESG data that we have today. In 10 years’ time, we will be looking at data we cannot imagine having access to today.


That cross between long-term ESG invest- ing and setting an objective means that institutions need to set out their inten- tions and how they will achieve them in their investment statements. But my advice would be to not get too bogged down by individual targets.


The ESG statement should sit in the investment policy as a separate docu- ment to be continuously reviewed and upgraded. Rather than being a document created once and not to be touched again because of a convoluted approval process within the organisation. It needs the flex- ibility to be regularly improved and updated. Keep it long-term, because you under- stand the journey and the direction that you want to go. And allow your organisa- tion the flexibility to learn about and adapt to the ever-improving methods of mean- ingful integration.


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