Supplements » ESG Report May 2021

Roundtable: Understanding context to make sense of ESG data

Pension funds, asset managers and servicers discuss the lack of interesting sustainable investment opportunities, the SFDR’s impact on UK investors and managers, and why contextualising data is key. Chaired by Romil Patel.

ESG_roundtable_May_2021

Magdalena Håkansson (Head of ESG, Första AP-fonden (AP1))
Padmesh Shukla (Head of investments, Transport for London Pension Fund)
Patrick O’Hara (Director of responsible investment and engagement, LGPS Central)
Cliodhna Murphy (Executive director – product development, MUFG Investor Services)
Joe Bello (Head of UK asset management sales, BlackRock)
Mark Guirey (Executive director – asset owner client coverage, MSCI)

Funds Europe – In 2020, more than 50% of inflows into European funds were invested in ESG-related funds despite initial fears that Covid-19 would slow the pace of sustainable investing. What are your expectations for ESG inflows over the next 18-24 months?

Patrick O’Hara, LGPS Central – I think we need to be careful when reviewing statistics around the inflow into ESG mandates. As we know, there’s a general lack of consensus about what an ESG mandate is and there is a wide variety of approaches to ESG integration. At this point in time, those sorts of statistics can be questioned. Having said that, the interest in sustainable investment is growing, the signals around climate change are getting stronger and I expect this trend to continue.

You’re going to see an increased flow into what you could define as sustainable mandates and sustainable investments. I see infrastructure in particular as an area where investors will look to invest, partly because of the [UK] government’s commitments to build back better post-Covid and the obvious need to restart economies, but not in the unsustainable way they existed prior to the pandemic.

We know that there are lots of issues around climate change and the transition to a lower-carbon economy that need to be addressed and it’s essential that we don’t go back to the trajectory that we were on before. This presents an enormous opportunity for us to reconsider how we want capital to be allocated and to bring about a different type of economics and capitalism than we had before.

Pension funds are looking for more opportunities in infrastructure and renewables – you could question whether there’s sufficient opportunity out there in terms of the size required for pension funds to really allocate to the extent they want to in these strategies.

Magdalena Håkansson, Första AP-fonden (AP1) – On the inflows into funds, it’s always about playing with the numbers – how you define things and make things up in the world. When it comes to funds considering ESG aspects and funds that are engaging as active owners, there’s an increasing momentum and it’s becoming more mainstream rather than a separate fund category. Then we have the more niche thematic sustainable funds which are directed towards more sustainable products and solutions. Here there is rather a lack of interesting investment opportunities – for us as a pension fund at least – than there is a lack of capital wanting to invest in these opportunities.

Cliodhna Murphy, MUFG Investor Services – In terms of the inflows, I echo the sentiment that there is a lot of capital that is being deployed. One area to look at is the transition to and growth of wealth by the younger generations who have a keen focus on responsible investment and are looking for those opportunities in terms of searching for products and funds to invest in. There is definitely a lack of products and funds currently across the spectrum from an investor perspective, and that needs to be a key focus for the asset management community.

Funds Europe – Where do you see demand but a lack of investable opportunities?

Håkansson – One example is the green bond market. Most of the issuances that have come to the market over the last couple of years are very oversubscribed and investors end up paying a premium for those. The question then is, is there actually a premium to them or is it more a consequence of the supply and demand in the market?

Murphy – One area that has been very positive is the huge amount of collaboration between investors, asset managers and regulators in terms of trying to solve problems, and I see echoes in that in how we’ve approached the pandemic and the vaccination programme. I’d like to see it continue in a positive way as we look to go forward, such as the UK saying that it would look to give surplus vaccines to Ireland and more collaboration between governments, technology and science to reflect that positive collaboration in the ESG space.

Joe Bello, BlackRock – Last year our CEO, Larry Fink, wrote in his annual letter that climate risk is investment risk and suggested that markets would start pricing climate risk into the value of securities, and we would then see a fundamental reallocation of capital. This year, he wrote that the reallocation of capital, the ‘tectonic shift’, accelerated even faster than he anticipated. Global sustainable ETFs had a record year in 2020 – we had US$86 billion of inflows, which is nearly triple where it stood a year before. So far in 2021, we’ve seen $42 billion (€35 billion) come in, and again this is global ETFs, so nearly 50% of last year’s record, according to BlackRock’s 2021 SFDR memo.

Last year we saw about 40% of our Ucits ETF flows being allocated to sustainable, and this year that number is near 58%. By 2030, BlackRock is suggesting that sustainable assets under management (AuM) will grow to $1 trillion from $200 billion today. Assets in iShares sustainable ETFs and index funds rose to $110 billion in 2020, with $81 billion in global iShares ETFs and $29 billion in iShares index mutual funds; iShares sustainable ETF and index fund assets more than tripled from $34 billion a year ago, and are up from $10 billion two years ago, this year’s iShares investor progress report shows. That acceleration is coming from a lot of different countries and client segments, but the trend is exceptionally clear, and we expect it to accelerate.

Mark Guirey, MSCI – The adoption of ESG or sustainable-type investments has been exponential over the last couple of years. To Joe’s point around the statistics, it somewhat depends on what you’re measuring. If you’re looking at equity, fixed income or thinking about infrastructure as an investment, dependent on the asset class that you’re talking about, the rate of adoption might be different due to the availability of solutions. In the ESG equity space there are a number of solutions in the ETF or pooled world that can be invested into today that would be classified as Article 8 or 9 funds from a Sustainable Financial Disclosure Regulation (SFDR) standpoint, so some of those solutions are there. There are some indexes and funds that are ESG and sustainable in the fixed income space, but less than equity. When you move into private asset classes, there are even fewer solutions, they are coming onstream and that probably reflects some of the differences in that rate of adoption.

Padmesh Shukla, TfL Pension Fund – On the institutional side, particularly large asset holders like pension schemes and asset managers, not thinking about net zero is not a choice anymore. As we all know, the Task Force on Climate-related Financial Disclosures (TCFD) obligations are going live for UK pension scheme with over £5 billion (€5.75 billion) in assets from October 2021.

When you think of carbon net zero, it’s an interesting concept because one has to go back to the basics of what net zero is actually telling you to do. Net zero doesn’t mean no carbon-emitting asset in the portfolio. Although it takes you in that direction, it’s not saying that your portfolio shouldn’t have any carbon as it’s not an absolute zero target, so terminology is important. To focus on a net-zero 2050 target, you almost have to work backwards. This can’t be a set-and-forget 30-year target – one has to break down it down by intermediate timeframes. What we have seen, at least in our industry, is targets being broken down for 2030, 2040 and 2050, then those targets being subsequently sub-divided into different asset categories and almost thinking through a sector-focused lens.

We haven’t set a target, as yet, but we are working in that direction and we are learning from both good and bad examples of targets being announced. When you start unpacking them, details are thin on how they will be delivered behind many of the announcements.