ESG – Feature
Human activities are threatening around a quarter of identified plant and animal species, while half of global GDP is threat- ened by nature loss.
“These are massive issues,” she adds. “Biodiversity loss and deforestation create risk for investors. We need to better under- stand that risk through understanding the impact the compa- nies we invest in have on nature, as well as their dependencies on it.”
Investors need to think about the connection between environ- mental sustainability, biodiversity loss and climate change, Ambachtsheer says. “It is about preserving natural capital. Reforestation, preserving land, managing land use and its impacts in nature.” Biodiversity influences many ESG factors, as does food. Burg- er lists supply chain, security of supply, human rights, labour conditions and the climate change implications of the food industry as the key issues that sustainable investors need to consider. “Livestock accounts for almost 15% of global green- house-gas emissions, which is the same as transport,” he adds. This has led to a rise in demand for alternative proteins. “There is a whole raft of technologies and new farming techniques coming through,” Burger says. “With global populations expected to rise in the coming decades, the environmental implications of mass farming are becoming more evident. 2021 could see investors thinking harder about that space.”
Going the extra yard Burger says that regulation around ESG will be tighter in 2021. “For asset managers, it is no longer okay to simply have responsible investment, ESG or sustainable policies. They will have to demonstrate their credentials in that space through reporting,” he says.
This could have a positive impact on corporates. “More stocks could soon be trading at a premium because of their strong ESG credentials, as funds need to demonstrate that they are successfully integrating ESG into their stock-selection pro- cess,” Burger adds.
The collaboration between SASB and the Global Reporting Initiative last year was designed to improve corporate disclo- sure standards. The expectations of society have grown thanks to social media, where the spread of information and feedback have become almost instant.
The result is, according to Varco, improved corporate transpar- ency, especially in supply chains. “The gap between high gov- ernance standards in your home market and lower governance standards in your supply chain never made sense. That is clos- ing fast.
“The momentum is strong for improving governance stand- ards in emerging markets,” Varco says. “Not owning certain
42 | portfolio institutional December–January 2021 | issue 99
poorly governed state-owned companies in emerging markets can be the gift that keeps giving.”
Alpha activism
Another interesting talking-point in 2021 could be the emer- gence of a new engagement trend. Corporates could soon face scrutiny on their sustainability pro- file from a new area, if they are not already. ESG fund manag- ers have typically been the ones to push corporates into improving their ESG performance and levels of disclosure, but now more traditional investors are seeing the benefits. Varco points to an example of a hedge fund manager pursuing “aggressive engagement” with managers around de-carbonisa- tion. “This hedge fund manager wants every company in his portfolio to measure their emissions and have a plan to reduce them,” he says.
“This is not an ESG manager. This is a successful hedge fund. It is coming from a space that most cynics of ESG regard as one of their own.
“This is the emergence of climate activism alpha,” Varco says. “By creating a portfolio of companies that are on the front foot when it comes to de-carbonisation and climate alignment he is seeking to create a better portfolio that will have better alpha. He is not doing it for the sake of mankind. “He is framing things in economic terms, which is impres- sive,” Varco says. “The spread of activism beyond ESG manag- ers is exciting because this is an economic issue as much as an ethical one.”
It’s not going to be solely about the E this year.
Caroline Ramscar, LGIM
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