Asset owners, managers and consultants examine the use of intelligence to pursue ESG, climate and financial goals at the same time, intermediary targets as a vehicle to meeting long-term goals and diversity in all its forms. Chaired by Romil Patel.
Michael Marshall (head of sustainable ownership, Railpen)
Maria Nazarova-Doyle (head of pension investments, Scottish Widows)
Günther Schiendl (chief investment officer, VBV Pensionskasse)
Nicholette MacDonald-Brown (head of European blend, Schroders)
Amandeep Shihn (head of emerging markets equity and sustainable investment manager research, Willis Towers Watson)
Guillaume Mascotto (head of ESG and investment stewardship, American Century Investments)
This roundtable took place before the US election was held.
Funds Europe – What is your key investment focus over the coming 12 months and where are you identifying good, long-term opportunities that can deliver sustainable outcomes as well as financial returns?
Günther Schiendl, VBV Pensionskasse – The issues over the next 12 months will be adapting, changing and reorienting investment portfolios so that they are, to some extent, Paris-aligned in terms of climate change. The challenge is also to keep the focus on identifying good return potentials, and climate change is an opportunity to find new return potentials. There is a lot to do and learn in terms of methodology – things like climate models or pathways will increasingly become part of our job. It feels like learning a lot of new things so that we are better prepared to deal with the issues in terms of ESG and climate investing.
Guillaume Mascotto, American Century Investments – While the US election outcome may bring bumpy markets, businesses exposed to the ‘stay-at-home/digital economy’, for example, software, data centre, cloud-based, and 5G networking companies, and those at the forefront of vaccine and therapeutics research, will likely remain attractive. These companies will also likely face heightened data privacy and security as well as product quality risks; hence the importance of structural ESG integration. We’re also finding cyclical companies with strong balance sheets and innovative product lines that could benefit from increased economic activity. It is possible the drop in air pollution may be offset as global industries ramp up again to make up for economic losses once Covid-19 is contained. In this context, we favour companies that go beyond regulatory compliance and embrace the right long-term strategic direction. In addition to strong social-related risk management programs, this strategic direction includes investment in renewable energy, negative emissions technologies and solutions that accelerate the transition to a circular economy.
Maria Nazarova-Doyle, Scottish Widows – My priority is to integrate climate risk into the asset allocation process, and we’ve started by doing carbon footprinting, but there is a better way to make sure that when we do asset allocation analysis, we actually optimise for climate risk alongside the traditional risk and return. That will lead to opportunities as much as risk mitigation.
We made a commitment at the beginning of this year to integrate ESG throughout all our investments – that’s £150 billion-plus (€166 billion-plus) of investments with different fund structures, managers and customers, so we’re working on following through on that commitment. That’s definitely going to take the next 12 months and probably beyond, because approaches to ESG integration could be different depending on what it is you’re looking at.
Another area where we’re looking to do more in the next 12 months would be extending the use of the fund that we launched with BlackRock. We created a fund called the Climate Transition World Equity Fund, and it has a dual goal in that it’s trying to reduce the carbon footprint of the portfolio, and it achieves about 50% carbon reduction against the index, but it’s also invested in climate solutions, so it overweights companies that are making good progress in the low-carbon transition such as clean air, or they have a high proportion of clean technology revenues or are really good at water and waste management. We launched that this year with an initial allocation of £2 billion and now we’re asking: ‘How much more can we put into this? What are all these products where this fund could come into?’
Funds Europe – What do you identify as some of the top transition risks in that regard?
Nazarova-Doyle – The fund scores companies in the MSCI World Equity Index. It scores them to arrive at their climate transition score, and it’s on a number of pillars, so things such as their core business involvement in terms of energy generation, carbon generation, but also how good are they in creating revenue from clean technology, carbon capture and green solutions? The fund manager also looks at the way the business operates in terms of their own energy mix for energy use for themselves, in terms of their water and waste management. The highest-scoring companies are overweight in that fund, so that essentially helps us mitigate some of the transition risk as we look to invest more in companies that are better prepared for that transition, in line with this transition programme and doing the right things. At the same time, we completely divest or invest less in companies that are at the bottom end of the score.
Nicholette MacDonald-Brown, Schroders – The way we are thinking about it is with our engagement with companies as we move towards the 2021 annual general meeting season, how we think about putting sustainability metrics into manager compensation, so driving it not just from portfolios and so on, but also what’s really happening at the micro level within companies.
The pandemic has really highlighted people. Climate has been a huge part of what we’ve discussed from a sustainability perspective for a number of years, but over the last six months, people have become acutely aware of how firms are treating their employees during periods of stress and their supply chains, so we’re really using this period of disruption to think about how we encourage companies to put long-term processes and methods into place to help protect employees and their businesses too. This is an opportunity to help people think about the sustainability of their businesses during periods of crisis, but also it happens to tie in with companies that are going through significant transition – whether it’s because of climate change or different aspirations from investors. It’s about working with companies to encourage them to be specific and not just think about 2050 and what they’re hoping to do, but what the pathway is going to look like.
Mascotto – The Covid-19 pandemic and its material human, economic and financial costs could very well support the notion that the environment, public health and the global economy intertwine. As such, the top issue for us is the implications of transitioning towards a circular economy. Companies must rethink resource consumption, energy usage and manufacturing processes with an aim towards eliminating waste and generating renewable output. Despite these challenges, we see upside potential in the areas of water stress management, digitalisation/automation, sustainable agriculture, bioenergy, smart-grid and power storage, as well as biomaterials and composites. Forging constructive dialogues with asset-intensive companies that still have room for improvement will also increasingly inform investment decisions in relation to transition risks.