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Supplements » ESG Report October 2021

ESG roundtable: Darker shades of green

 

Funds Europe – The UK’s financial regular warned fund managers that their “poor-quality” ESG fund applications and data must improve. How should fund managers and pension funds be communicating their ESG and sustainable investment strategies, substantiating assertions around their goals?

Barrie – The way that fund managers are incorporating ESG right through their decision-making process is of great interest to us – not just how you incorporate to ESG scores in various different ways to improve understanding, but also the next step: how you take those scores and act on them through investment and stewardship processes. Do you have a consistent and clear proxy voting policy? Are you members of collaborative engagement initiatives such as Climate Action 100+ and the Investor Mining and Tailings Safety Initiative?

More broadly in relation to communicating and substantiating, there are significant benefits in supporting collaborative initiatives that are based on a publicly available assessments and standards. The Transition Pathway Initiative is a good example – there is an opportunity to align behind a credible set of public assessments, demonstrate progress over time (or otherwise!), and all in a package that is decision-useful, and supported by many investors. We have worked with FTSE Russell to create a climate transition index based on TPI assessments and moved all of our passive allocation to track the index.

Alexeyev – There is consensus that asset managers should be communicating clearly and truthfully. They also need to address the spectrum of information appetites that you have from different investor bases. Looking at retail investors, they may want the quick bottom line, a compelling story and examples of how their investments make a difference.

Professional fund selectors, on the other hand, are digging deep into all aspects of the ESG investment process and shareholder engagement and governance. How are the portfolio managers involved in the process? How do they work with the ESG specialists in the firm? What data sources do they access? How do they reconcile discrepancies in the signals that data generates?

Technology plays a very important role in streamlining communication and increasing the efficiency of knowledge transfer, such as through automated SFDR [Sustainable Finance Disclosure Regulation] reporting. If we can leverage artificial intelligence, natural language and processing engines on top of that technology, then perhaps we can extract further insights on best practices that can be more readily adopted by the industry.

Gloak – Transparency is key, so we need to make sure that sustainable investment strategies are as simple and easy to access as possible. The main aim of the EU’s SFDR is to increase transparency.

From the outset, index strategy objectives need to be clear about the benchmark that the product is following. More data is also needed in the market space. Having those sustainability characteristics posted, what the fund is doing, what a parent index might be doing, as well as including ESG score carbon-intensity figures is crucial. Educating clients is also key, so that we help strengthen their understanding of their investment objectives.

Mahmood – Despite the general trend towards ESG no longer being a supplementary consideration and increasingly a core part of securities selection, the fact remains that not every investment strategy will be first and foremost a sustainable investment strategy. Those that are or claim to be certainly have a degree of responsibility towards being transparent and as informative as possible on what they hold, why they hold it, how they hold it and how it fits with their broader sustainability strategy. Standardised frameworks help in this regard, such as EU taxonomy and SFDR, which not only raise the bar for transparency and disclosure, but help make better comparisons and more informed decisions.;