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Supplements » ESG Report Spring 2020

ESG roundtable: One shot at refinancing a fit-for-purpose economy

Funds Europe – What are some of the loops that need to be closed in terms of data and what sort of disclosure do you require but are currently not getting?

O’Hara – Most of my work in the last three years has been on bottom-up company level analysis working with portfolio managers and actively managed portfolios. It can be frustrating when companies produce lots of ESG/CSR-related data, but scope 3 emissions or asset-level disclosure is missing. Often very little detail is provided around their supply chains’ physical location, resilience, or how easy it would be for a company to shift their supply chain if necessary. This speaks to the resilience of the business in a carbon-constrained world impacted by the effects of climate change. This becomes even more difficult when you consider unlisted companies, who provide even less information to investors/bondholders. The more inherent assumptions in your analysis, the more difficult it is to rely on the results.

A lot of company disclosure is aggregated up to the entity level, so for a conglomerate that has operations all over the globe, you can’t really identify hotspots and areas that you really want to engage with the company on as an investor. There are a couple of examples of that. We’ve had companies in the portfolio where, overall, their health and safety performance looks reasonable compared to the peer group, but we find out that there are concerns in a particular operation or country that could manifest into serious issues in the future if not addressed. 

Pedersen – The whole world is interconnected and everything we do is dependent on how we treat the environment and planet, and this is going to rise. 

Regarding the coronavirus, there is an investor statement that we have co-signed with the Church of England, US teachers and a lot of commercial asset managers where we’re asking companies to behave responsibly, provide paid leave, maintain employment as much as they can, hold back on share buybacks and in some cases, dividend payments, to ensure their financial health because we don’t know how long it’s going to take. We have some engagements with companies – especially around health and safety issues. What we have also done is taken some data that we got from one of our providers and mapped that against that investor statement, so we’re using controversy data mapped against those issues that I just mentioned to drive our engagement in that area, but that’s the short to medium-term Covid-19 issue, which makes the ESG dimension extra-important. 

Funds Europe – What qualifies as controversial data?

Pedersen – It is simply providers who pick up press or NGO mentions of companies in relation to the issues that we’ve raised in connection with the coronavirus, so where there’s a sign that something is heating up or something may be going on which we would not find acceptable. Or the other way around – where we would like to commend a company on a little more, then we’ll bring that up with them. 

Nummela – With the danger of sounding doom and gloom, there’s a macro issue on why it is more important than ever. At the moment, given the stimulus going into the economy over the next 18 or so months, I think the faith in the Paris Agreement will be sealed. We won’t, as a humanity, be able to spend that sort of money again to solve another crisis within the next ten or 20 years, which is why it is more important than ever. 

What is the opportunity here? The transition risks and opportunities are being divvied out over the next year or two, therefore the analysis and understanding scenarios is extremely important. 

I sympathise with the lack of data at the individual asset level, but then again for strategic decision-making we have that good 80/20 rule type of data and ability to look at where we can start to make the changes, and this is fundamental for where we are at the moment. That is why it’s more important than ever and can be acted upon. 

O’Hara – I echo that – it is more important than ever because we are not going to get a second chance at refinancing the economy, and it has to be done right. I don’t envy governments because they have to maximise the bang for their buck in terms of the restart and in creating jobs and economic activity, but equally they have to reflect on the fact that they don’t want to recreate an economy that ultimately in some aspects wasn’t fit for purpose and wasn’t well positioned to adapt to a lower-carbon world and was predicated on unsustainable consumption patterns.

We know that there are projects and investors out there looking to invest in opportunities arising out of the transition to a lower-carbon economy and it appears to me that this is a golden opportunity for governments to facilitate and encourage those flows through their investment programmes and incentive schemes, and this is a big time for them in terms of mapping that out. 

The coronavirus has brought to a head some of the issues that we talk about in the responsible investment world, such as long-termism and stewardship. We are owners of these companies and not speculators in their share price, and with ownership comes responsibility. This has been an interesting voting season. Annual general meetings (AGMs) have been postponed and dividend payments delayed or cut. It is difficult for us as investors, particularly those investing for income, but we recognise that these decisions have been taken in the best long-term interest of the business and all associated stakeholders such as employees, customers, local communities and society at large. There may be a few exceptions, but it is difficult to challenge management on this. If as investors we feel that we can’t trust management at this time, then it begs the question: should we be invested in that company? 

As owners of these businesses, we also have an obligation to share some of that burden. It is in our best long-term interests as investors that we do so. This difficult time in history has illustrated that the interests of stakeholders are aligned over the longer-term as many investors have been saying for a long time. As investors, we need strong, resilient and responsibly managed businesses and strong, resilient economies to provide pensions to future generations. 

Arkko – I agree about refinancing the economy – this is a one-time opportunity and it is now. Besides the climate aspect, I also think that the pandemic has brought social issues into the spotlight. In terms of companies understanding how they treat the workforce in their supply chain, so far, it’s been more of a reputational risk, but now there is an understanding that it’s also an operational risk and a short-term operational risk. So, if you don’t treat your workers right, that might have serious conclusions.

Millet – There is very clear evidence that ESG will emerge stronger from the current crisis; it has in particular highlighted the extraordinary resilience of ESG assets and inflows through the whole period since the end of February. 

The ETF market is a very lively, dynamic market which is a good proxy of the structure of the flows in the global market. Even if ESG investments are long-term, it’s very important to look at all the signals we have from the ground up in the market now. There has been very strong disinvestment from the traditional indices and beta products between February 24 and March 25. In Europe, we are talking about €36 billion of disinvestment, and during this terrible period there has not been a single outflow from ESG ETFs – they have continued to slightly gather additional assets as if nothing was happening in the crisis, which is not necessarily finished. So, they are on a slope of gathering new assets, which is now more moderate but still quite positive. 

When it’s a question of survival, we see that we have had a tendency to not work enough on the resilience of our systems and too much on a maximisation of the utility – the profit utility or the growth utility of our systems while they were already in growth. A big lesson of this crisis from social and other aspects is that if we want to stick with a liberal system, capitalism must change to save capitalism. This is a strong implicit message that we have in all socially responsible investment objectives. ESG investments will clearly emerge much more important than before – it’s not a trend, it’s a transformation of the market.