Feature


Investors like numbers. They help them to see things more clearly when making decisions on whether to buy or sell a particular asset. “There is an inherent attractiveness in boiling something down to a number or rating, so as to provide a signalling mechanism,” says Lloyd McAllister, a responsible investment analyst at Newton Investment Management. Yet times are changing and so are the type of numbers investors are seeking. “The investment industry is in the middle of a tidal wave of change in that there is a demand for integrating sustaina- bility into all investment portfolios,” says Mark Lewis, global head of sustainability research at BNP Paribas Asset Management. The non-financial aspects of a company are becoming just as, if not more, important as what is written in its latest financial results. Factoring environmental, social and governance (ESG) aspects into investment decisions is no longer considered niche as long- term investors look for sustainable and, therefore, better-behaved companies. And for good reason. It would have been difficult to spot the data misuse scandal at Facebook before it exploded into the headlines by simply looking at its profit and loss account or credit rating.


A range of organisations are rating companies on the strength of their ESG credentials, from data providers to index compilers, consultants and even asset managers. “Constructing frameworks for ESG is important for investors’ to have clarity on how to incor- porate issues, such as climate change, into their mandates,” says Margaret Childe, managing director, head of Canada for ESG research and integration at Manulife Investment Management. “If we go back 10 years, the focus for reporting would have been on sophisticated financial instruments, such as derivatives,” Childe adds. “A huge shift has taken place. ESG is now in the spotlight and we need to pay attention.”


The question is, how do you turn the level of a company’s harmful gas emissions, water usage and how it treats its staff into a nice, neat number. “It is difficult to accurately reflect the sustainability profile of a company in a simple score. It is not an exact science,” says Masja Zandbergen, head of ESG integration at Robeco. With ESG being such a broad church, it’s best not to treat these ratings as an all-encompassing assessment of a company’s sus- tainability profile. They measure a certain aspect, be it the quality of disclosure or the level of harmful gas emissions. Then you need to understand how that rating is constructed and if the methodol- ogy behind it aligns with what you are trying to achieve. “It is important to look under the bonnet,” says Tim Manuel, head of UK responsible investment at Aon. “You have to take the output [the rating] with a pinch of salt, or with an awareness of the limita- tions that you are looking at.”


May 2020 portfolio institutional roundtable: ESG


19


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24