ESG – News
products or activities could have a negative effect on society or the environment. Other areas of concern include alcohol, tobac- co, gambling and weapons.
One benefit of the focus on momentum is that it offers more po- tential for value appreciation, given that it does not just include the most sustainable and therefore often expensive companies. A recent Morningstar study lists Total, Shell and Repsol as some of the firms making the most progress in cutting emissions. But Morningstar also points out that despite these improvements, all firms fall short of aligning their CO2 output with the Paris Agreements.
A more targeted-oriented approach towards sustainability could be the inclusion of the United Nations’ 17 Sustainable Develop- ment Goals (SDGs). Several big asset managers, including Robe- co and iShares have pledged alignment to the SDGs for some of their fund offering. Some firms go as far as excluding oil giants and car manufacturers altogether, but so far, this remains the ex- ception, rather than the rule.
This is partly because excluding fossil fuel firms and car makers would shrink the investable universe in European equities to 365 firms. Moreover, oil continues to be a cornerstone of the global economy for the time being and oil companies have of- fered relatively high dividend payments. But some investors are starting to price in the costs of climate change and are willing to make a conscious decision not to take part in profits from cer- tain sectors. Trustees in the UK will increasingly have to brace themselves for the fact that passively investing in ESG cannot be seen as a short- cut to sustainability, argued Russel Pictot, trustee chair at HSBC Pensions, at this years’ PLSA conference in Edinburgh. “I don’t think it’s acceptable anymore for trustees to invest in a passive indexation strategy and take a passive approach to stewardship,” he said.
Studies show that sustainable investments do not tend to have a negative impact on returns and reduce reputational risks. Avoid- ing a particular sector can nevertheless lead to a dramatic reduc- tion of the investable universe and would require significant bal- ancing skills. Many institutional investors have good reasons not to exclude certain sectors. Being overweight on solar energy, for example, would not have necessarily been overly profitable. Moreover, ESG investment should not result in neglecting the importance of risk management, after all, the investment should also be sustainable from a financial point of view. But neither should it be in the interest of ESG investors if the term sustain- able investment has turned into a mere marketing concept with little impact on the portfolio constriction. With that in mind, the inclusion of energy giants in funds that are promote for their en- vironmental standards continues to appear misplaced.
This is an edited version of an article that first appeared in portfolio in- stitutionell, the German sister publication of portfolio institutional.
Issue 96 | September 2020 | portfolio institutional | 35
I don’t think it’s acceptable any- more for trustees to invest in a passive indexation strategy and take a passive approach to stewardship.
Russel Pictot, HSBC Pensions
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