ESG | Feature
portfolio. Regulation has cranked up the pressure on trustees to disclose if they are meeting the TCFD’s recommendations. “What is the state of readiness for TCFD disclosure among pension schemes? Very little. That is why the battle ground is on the data,” Belgrove says. Generating accurate data could be easier in the coming years with corporate disclo- sures expected to become more common. ESG is a broader set of initiatives than sim- ply climate change and so metrics such as water conservation, soil erosion, plastics and gender equality could fea- ture in corporate reports as standard one day. “For a long time, data has been the Achilles Heel of ESG and there is still a long way to go,” Salarbux says.
lar of ESG coming more into focus this year. A shift is happening with companies hav- ing to demonstrate that they are acting in the best interests of not just their share- holders, but their stakeholders, too. The ethos is changing with directors not only having to drive value, but also understand the impact that they are having on local communities and the health and wellbeing of their staff. Salarbux describes impact investment as one of the fastest growing asset classes
2020 may not only be the year where the quality of sustainable data comes under increased scrutiny, it could also see a breakthrough in the way data is used, says David Czupryna, head of ESG client portfolio management at Candriam. “ESG has so far been predom- inately backwards looking,” he adds. “We use historical data, company analysis based on past behaviour, past controversies.” The point is how can data be used not only to measure non-financial performance, but also to anticipate future trends that could become material. Sugar is an example. It ruins peoples’ health but is not material. “Coca-Cola’s share price does not drop because of that,” Czupryna says. “On the other hand, plastic has become material in that regulators are banning single-use plastic, such as straws. With more regulation coming in on pack- aging, plastic is a material factor and will start impacting some sectors.
“That is an area that with the quantity of research we are seeing, we expect to see some development in 2020,” he adds.
MAKING AN IMPACT
Whilst there remains a stronger focus on carbon mitigation, Aon’s Belgrove believes that we could see an increasing interest around impact investing with the social pil-
The whole question of supply chains is going to be a big topic. Mark Lewis, BNP Paribas Asset Management
after real assets. “I can see from large insti- tutional clients that impact investing is going to be something that will be looked at quite intensely this year,” he adds. Only being a decade away from having to meet the sustainable development goals is another catalyst for driving interest in social projects, such as employee wellbeing and providing quality education. The E and the G in ESG are widely under- stood and covered, but the S component, which focuses on human capital, human rights and their respective impact on local communities, is becoming increasingly important, says Andrew Parry, head of sus- tainable investing at Newton Investment Management. “The S is a more challeng- ing, but more interesting pillar. “When you think about it, all companies are social enterprises. Newton’s parent company BNY Mellon employs 65,000 people. That is the same size as my home- town in South Wales. “If you agree with the assertion that companies should be regarded as social enterprises, then ignor- ing the human capital, social impact and human rights issues is not a good idea,” he adds. “It is an area where we will see increased focus among pension schemes.”
GOVERNANCE UPGRADE Following the governance scandals at large tech companies in recent years, Chew believes that there will be more scrutiny around how private equity firms are build- ing up their portfolio companies with gov- ernance structures that minimise account- ability to broader stakeholders. What is inherent in the private equity busi- ness model that seems to be promoting companies to astronomical valuations and dumping unprofitable businesses on the public markets while company founders are not accountable to share- holders because of the govern- ance structures that have been put in place. Big tech is becoming to govern- ance what oil and gas is to cli- mate change. There have been issues around data security, alleged interference in national elections and loss-making com- ex-directors
panies paying millions of
dollars. With an election in the US later this year, pledges to clean up the industry are likely to be made.
“There will be a bigger conversation on the role of tech companies and their net value generation for the economy and society, once you take into account the negative externalities,” Chew says.
HERE TO STAY
The people I have spoken with talk to trus- tees and their investment managers regu- larly, so are well placed to spot emerging trends. ESG will continue to be a topic dis- cussed by commentators and investors alike as “we are still in the early phase of mainstreaming ESG in the financial indus- try,” Lewis says. “It is not a passing fad,” he adds. Just be prepared for 2020’s unexpected vegan sausage roll moment. “There is always going to be curve ball,” Chew says. “That could be triggered by a controversy or a major weather event that shifts the needle in a direction that is not expected.
“The new normal in the investing space is to expect the unexpected,” she adds.
Issue 89 | December-January 2020 | portfolio institutional | 27
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