Feature | ESG
Elton John probably wishes that everything in life is as easy as making music. Enter- taining millions of people with a songbook that took 50 years to write is more black- and-white than trying to save the planet, a task that is littered with grey areas. In August, the Candle in the Wind, Rocket Man and I’m Still Standing singer claimed that he had paid into a fund to offset the carbon footprint of a private flight he arranged for two of his royal guests. The effectiveness of this payment in fighting climate change has been disputed by Greenpeace, an environmental pressure group. Who is right and who is wrong? When it comes to some areas of the envi- ronmental, social and governance (ESG) sphere, it is difficult to know. Yet it used to be so simple. Most investors added a company to their portfolio in the belief that its profits would rise and that they were comfortable with the risk taken for the price paid. They might have even gotten a share of the spoils in the form of dividends and hoped that the size of those payments would increase year after year. To confirm that a company was meeting these objectives, all an investor had to do was read the audited annual report. Obvi- ously, these motivations still lie at the heart of buy and sell orders, but today other fac- tors are also influencing investment deci- sions, the results of which can rarely be found in an annual report.
BENEATH THE SURFACE Investing in assets that make a positive impact on society and avoiding badly-be- haved companies was once considered a niche strategy. Not anymore. At the beginning of 2018, $30.7trn (£25.2trn)
was invested in sustainable
assets globally, a 34% rise in two years, according to Global Sustainable Invest- ment Alliance.
“Demand for ESG analysis is going through the roof across our client base,” says Tim Manuel, Aon’s UK head of responsible investment. “Increasingly schemes are ask- ing for assessments of what it is that their portfolios are achieving, what is the differ- ence that they are making.”
“Investors are eager to get evidence that ESG is contributing to financial perfor- mance,” adds David Czupryna, head of ESG client portfolio management at Candriam. But can asset managers and consultants meet demand? Attitudes towards the non- financial risks facing corporates have changed and the investment industry is struggling to keep up. “ESG data is still a developing area,” Manuel says. “Investors rely on data which is not always available.” The lack of robust information in this area from companies and independent bodies is causing problems. For instance, how can an investor know for sure that a company has hit its greenhouse gas emission reduc- tion target, is using less water, has no chil- dren working in its supply chain and is keeping the personal information of its customers secure?
Not every company, for example, publishes its emissions data, so providers work it out for themselves.
“What that leads to is data that can be quite substantially different with a low correla- tion between providers,” Manuel adds. “The quality of ESG analysis is only as good as the data and the data continues to evolve and improve,” he says. “The levels of disclo- sure from companies will make the biggest difference to data quality.”
And corporate disclosure is improving thanks to regulation, but it is still early days. From next month on, for example, the revised EU Shareholder Rights Directive requires
pension scheme trustees to
explain how they are protecting savers from the impact of climate change. Lloyd McAllister, a responsible investment analyst
at Newton Investment Manage- ment, welcomes the regulation that has
We certainly need more standardisation
because today we are not comparing apples with apples and pears with pears. Helena Viñes Fiestas, BNP Paribas Asset Management
Without robust data to assess the perfor- mance of their assets, investors run the risk of gaining a false sense of confidence that they are doing their bit to improve society, whereas in reality they could be doing little more than running a public relations campaign, otherwise known as “greenwashing”.
GUESSING GAMES
ESG is a broad church. It is not just about being kind to the environment. Leadership diversity, how the board makes decisions, the use of resources and staff welfare are among the aspects that appear on sustaina- ble investing checklists. Yet measuring the success in areas such as this is not an exact science. Manuel says that the industry is characterised by differ- ent approaches and that ESG rating provid- ers are using a “high degree” of estimation.
28 | portfolio institutional | September 2019 | issue 86
been introduced as a “move in the right direction”, but he is concerned that it is “three or five years behind where the mar- ket is”. He points to the EU’s ESG defini- tions as an example, describing them as too “simplistic”. The problem for him is that the EU definitions lead with the term “envi- ronmental solutions” which is then fol- lowed by a list of distinct areas such as renewables. “This is sustainability invest- ing from five to 10 years ago, rather than focusing on an industry’s value chain or externalities, which is where things are today,” McAllister adds.
HOME GROWN To fill the void, several ESG assessment methodologies have been created by con- sultants and asset managers. Robeco Asset Management’s uses its Robe- coSAM subsidiary to assess the key ESG
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