Since its founding in 2010, Amundi has not only become one of the world's largest asset managers, but also one of the largest responsible investors. Thierry Bogaty explains how and why.
What is wrong and what is right is an ethial debate at the centre of responsible investing and, though it may divide opinion, there are at least some maxims.
For example, a number of institutional investors and their asset managers have campaigned for eliminating child labour in global value chains, especially in the agricultural sector where 60% of the children implicated with child labour are said to work, one of the most dangerous sectors in terms of fatalities.
These investors include Amundi, the largest asset manager in Europe with €1.4 trillion of managed asset, which has put pressure on cocoa and tobacco firms to improve, among other recommendations, their level of transparency about child labour, to educate farmers about the dangers and possibilities of to prevent child labour, or to formalise a policy on child trafficking.
Few reasonable people would disagree with this stance, yet for many, the maxim is simply that there should be no investment at all in businesses that use child labour. So why is it that investors with responsible investing strategies will condone - albeit in a limited way - that some children in certain countries do work?
The answer lies in how responsible investing is evolving beyond stock exclusion and into an environment of deeper engagement with corporates to effect change.
"Some institutions take the world as it is but they want to create a better one. In doing so, they are becoming more comfortable in engaging with corporations to achieve that," says Thierry Bogaty, who is Amundi's head of SRI expertise.
Assets under management in responsible investment strategies saw a 25% jump to $22.89 trillion between 2014 and 2016, according to the Global Sustainable Investment Alliance.
Amundi's responsible investments total more than €200 billion. Moreover, the least well-rated companies according to its internal environmental, social and governance (ESG) set of criteria are excluded from all Amundi's active management strategies, says Bogaty.
He adds that although Amundi will still exclude some companies (such as tobacco firms from its SRI open-ended funds, or companies realising more than 30% of their revenue from coal extraction), in other cases it will not.
This is because either an institutional investor wishes to engage with an ESG topic, or because Amundi itself wishes to engage with it.
"Divestment remains a powerful sanction, but by doing so you give up the ability to influence the company or sector. Staying invested in companies committed to improve their practices helps to spread sustainable behaviour among peers."
"Amundi was created in 2010 after the 2007/08 financial crisis and at that time, Yves Perrier, our CEO, made responsible investment a pillar of of Amundi's strategy," says Bogaty.
Gradually, the ESG criteria that Amundi developed spread from conventional asset classes to real and alternative assets like private equity, private loans, real estate and infrastructure. The strategy became mainstream to Amundi just as it started to become mainstream to the fund management industry in general.
A comprehensive approach
Amundi's ESG policy extends across all of Amundi's active strategies and increasingly over its passive investments - for example, with its low carbon range, or through its ESG customisation capabilities in passive portfolios. Amundi has an ETF and indexing business which has €72 billion of assets under management.
Amundi's ESG policy is a mix of best-in-class, execution and engagement. Divestment aims to get rid of the worst offenders on ESG grounds - issuers that Bogaty says "you wouldn't want anything to do with". But it is of crucial importance for the manager to approach ESG in a comprehensive way. "A simple divestment policy prevents sset managers from effectively doing their jobs," says Bogaty.
All of Amundi's portfolio managers have access to an issuer's ESG rating along with the issuer's more standard financial and credit standing. ESG ratings are arrived at by Amundi, based on data from third-party providers.
There are 36 criteria in total, 15 are generic and 21 are specific to business sectors.
"We work with four ESG rating agencies and other external providers, but it is important to us that the rating we issue in the end is our own rating, so we have our own set of criteria and combine quantitative analysis with an in-depth qualitative analysis," says Bogaty.
"Water, for example, is essential to electricity companies, so we give a much higher weighting to water risk in that sector. If we just used an average weighting system, then everyone would pass the 'exam'."
All issuers with a G rating - Amundi's lowest rating - are excluded from active portfolios.
The ratings are used to establish a 'best-in-class' for each sector, which ultimately leads to an understanding of industry best practices to which companies can be engaged with to either meet, or surpass. It is here where the ESG policy moves beyond exclusion and into engagement.
"We meet with the companies that are most important for us in order to carry out a qualitative assessment. Basically, we want to help these companies improve. But there is also a second element to this, which is thematic engagement, which covers issues such as human rights in mining," says Bogaty.
Beyond engaging with issuers, there are also the shareholders. Shareholder dialogue is a third element of Amundi's process. This involves more than establishing a voting policy, which Bogaty describes as "normal for an asset manager" nowadays. Amundi's shareholder engagement is also run through direct contact with other shareholders over ESG issues.
Coming of age
With such a large and quickly growing amount of assets under management, ESG investing is coming of age. The questions of what is ethical and which is the best ESG approach is a maturing debate as a consensus forms around a mix of best-in-class model, exclusion and engagement.
However, another important discussion that also persists is the effect that ESG-led investing has on returns.
"Three years ago we published a study that found that using ESG filters does not harm performance," said Bogaty.
The study is called 'SRI and performance: Impact of ESG criteria in equity and bond management processes'.
"It was said that if you reduced the investment universe, you would reduce performance. But we demonstrated that you would not and there have been more than 2,000 studies worldwide that have showed that ESG, if used in a pragmatic way, enhances performance.
"In our SRI funds, we exclude roughly one-third of the MSCI world. If we look at our SRI equity euro fund, then combining a financial signal with an ESG rating has led to a gross outperformance versus its reference index in three out of every four years since 1999."
Bogaty adds: "ESG works in real life and we have funds that are more than 15 years old that prove it."
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