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Supplements » ESG Report Winter 2020

Roundtable: Pursuing ESG and pursuing financial returns is exactly the same thing


Funds Europe – In our previous ESG report, Günther said that “change will take time, so goals should be marked with timestamps”. By 2050, he would have been retired for 15 years, so to say that you’re going to achieve something by then would be “nonsense”. What are your thoughts?

Michael Marshall, Railpen – It’s an excellent point, and I don’t think anyone would disagree with the fact that we face something of a measurement problem when it comes to commitments like net-zero, where you’re promoting a climate commitment first. For a long-term diversified investor like ourselves, that’s a commitment that must bind across many different asset classes which don’t have metrics or methodologies that are additive from one to another. We all face this challenge of how do we make a commitment that’s meaningful, measurable and that we can deliver against? We need to work out whether we are really on track or not. 

A corollary or related problem is how do we test the impact of shifting to such a strategy in terms of risk and return? Do we make the commitment first and do that testing later, or do we do all of our homework first and make a commitment once we’re comfortable? That’s a real challenge for investors, and different people are taking different approaches. 

On your specific question about should we set intermediary milestones and targets and not just long-term ones – absolutely. Some of the assessment frameworks and ratings systems that are applied to us, or that we apply to investee companies, reward the investors or companies that set remuneration in alignment with things like climate targets or ESG integration programmes and so on, but what’s the point of that if your whole programme is based on a very long-term outcome? Alignment has to be to targets over, say, three to five-year periods. That’s the kind of expectation we would have for a portfolio company, so it’s the kind of expectation we would set for ourselves too.

Amandeep Shihn, Willis Towers Watson – We tend to take investment views over five years plus. So, when taking such long-term sustainability views across decades, it’s important to signpost where you want to go and have milestones to check progress along the way, but be ready to adapt along the way. Progress can and has been made. This should sow the seeds for future evolution. We are looking at this from the perspective of our clients and also in terms of the fund managers who we allocate capital to. 

On the client side, one of the biggest areas of improvement is how we integrate and identify sustainable investment risks within investment portfolios at a total portfolio level, so across various asset classes, and undertaking scenario analysis with a climate focus. We want to think beyond just carbon footprints because we also recognise that some climate solutions may come with a higher carbon footprint than a benchmark index. We’re trying to put into effect scenario analysis around climate change, how it might affect different asset classes and where you can take some risks and find opportunities – all with a view of leading to practical portfolio solutions.  

In terms of the individuals responsible for managing our clients’ assets, our mission is to continually push fund managers to do better on topics such as identification of risks and opportunities with a sustainable investment mindset and pinning that down properly within the investment process. We’re not necessarily asking for or looking for wholesale changes in how they manage money as we don’t think that a fund manager changing how they view the world will necessarily lead to better outcomes, but you can improve the system by iterating and evolving an existing process to taking into consideration new and relevant information. We review those manager ratings where we’re not seeing enough progress and have downgraded managers who we don’t view as making sufficient progress and directed client capital elsewhere.

Mascotto – Like with any project, I believe it’s not about speed – tactical changes are not sustainable, strategic ones are. Before articulating an argument on how sustainable development is achievable, it is necessary to focus on why it is not. If sustainable development is not yet compatible with our current, fossil fuel-dependent system, change must come from within the system – one that maximises the incentives to unlock innovation in order to reduce costs and encourage the commercialisation of advanced and knowledge-intensive renewable energy/closed-loop technologies (process) to change the system (structure). We contextualise ESG risk analysis per our investment time horizon and seek companies that, in recognition of their exposure to ESG issues such as climate change-related risks, are investing in new avenues of exploration via establishing SMART [specific, measurable, achievable, relevant, time-based] targets directly tied to long-term executive compensation and corporate planning, while remaining focused on disciplined use of capital and above-average corporate governance.