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Supplements » ESG Report Winter 2020

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

Funds Europe – On the one hand, we have the climate crisis, which is still the most urgent challenge facing us, and on the other, we have the Covid-19 pandemic, which has accelerated conversations that might have taken a number of years to the here and now. Against this backdrop, what are your top three ESG priorities?

Mascotto – Some observers think the Covid-19 pandemic detracts from the fight against climate change. In reality, the drastic mitigation measures put in place to fight the virus is helping clear the air. While weather conditions could skew data of satellite observations, asset owners focused on decarbonising their portfolios may take the opportunity to redouble their efforts – arguing that transitioning toward a lower-carbon economy is, in fact, doable. Against this backdrop, we have identified three major ESG implications.

First, while fossil fuel divestment will continue to be an option to reduce climate change-related risk, we are emphasising an ESG momentum approach focused on the combination of cleantech thematic tilting and engagement over full-fledged divestment. 

Second, we believe investors will increasingly embrace the notion that the environment, healthcare and the economy intersect. As such, we are focused on companies whose businesses accelerate the transition toward a circular economy as well as on companies involved in medical innovation, access to medicines, healthcare cost reduction, and efficiency solutions for diagnostic tests and therapies.

Third, relative to developed markets, living standards in emerging markets are among the lowest in the world and the region is also more vulnerable to environmental and health-related issues, such as pandemics and rare diseases. All these conditions support our focus on investing along the UN Sustainable Development Goals (SDGs) in emerging markets, in particular SDG goals 1 (no poverty), 3 (good health and wellbeing), 7 (affordable and clean energy), 8 (decent work and economic growth) and 9 (industry, innovation and infrastructure).

Shihn – Both the climate crisis and Covid-19 are important issues to find solutions to sooner rather than later. Taking a long-term investment view, our top three ESG priorities are climate transition, diversity and inclusion, and integration of sustainability considerations within investment portfolios. 

We are increasingly more comfortable in taking a harder line on assets which are less likely to be able to transition towards cleaner solutions, such as tar sands and thermal coal within some investment portfolios. But we do still think that energy is an area which industry investors will still want or need to have exposure to in some measure going forwards, which is why transition plans and action are critical when considering the climate crisis we are faced with. 

Nazarova-Doyle – As an asset owner, we delegate a lot to managers, but we always set the strategy and expectations for them. We have four tools to manage ESG risks and capture ESG opportunities, which are: exclusions, stewardship, tilts allocated to specific themes and integration. Integration is very important and that’s mostly the remit of active management, so when you completely integrate that ESG thinking from the bottom up at the stock selection or the instrument selection level. In a way, we piggyback off full ESG integration of assets and as an asset owner, it gives us peace of mind that our managers are doing the right thing. There’s also the element of stewardship of our asset managers to make sure that they are doing what they told us they are. We do stewardship directly with some of the largest holdings, particularly focusing on the top 20 holdings that we have across our portfolios and adding to the efforts that our managers are already undertaking in that space.

Marshall – Like Maria, we do ESG integration and stewardship, we link voting to our climate beliefs, we report according to the Taskforce on Climate-related Financial Disclosures (TCFD), we have most of our assets in-house where we directly integrate part of risk management bottom-up, and for our remaining external managers, a review of their climate competencies is part of a selection and monitoring process. When identifying additional ESG priorities, we are judicious, so we do not overreach and sacrifice quality for volume, and from a sustainable owner perspective, we are careful to make sure our priorities synchronise with the organisation’s direction of travel. Railpen’s journey has been to build an internal investment management function, to save costs by doing that, and to more straightforwardly express our beliefs about where long-term investment opportunities lie. 

The next stage in our process has been to establish an internal fiduciary function. The sustainable ownership team which I head sits in our fiduciary offering, not our investment management offering. What we’re looking to do with how we manage climate change is not just approach it from a bottom-up perspective – which stocks we select, the risk-based exclusions we apply, inclusion of climate change in the stock note or the credit note, being part of Climate Action 100+, using Transition Pathway Initiative data to help inform our shareholder votes – but also from a top-down perspective. 

What can we do top-down that is supportive of our members’, our beneficiaries’ long-term interests that relate to climate? Well, we can incorporate it into investment risk management, our assessment of covenants, valuation work, ALM and investment strategy. It’s those additional fiduciary aspects that we’re going to be working on next, but that’s not to say that the bottom-up work won’t remain a really important piece of work. 

Nazarova-Doyle – There is a strong theme coming out in that you have to do both bottom-up and top-down, it’s not really an either/or.

MacDonald-Brown – It’s partly because there is this huge complexity to deal with that probably the more sophisticated your integration process is, the harder it is to audit, validate and compare to another person or business. This desire for an explicit headline, that ambitious target combined with the bottom-up is important to help people compare what are pears with pineapples and different things. That dual role is really important.

Schiendl – Our top three ESG concerns are improving signing/updating the ESG governance structure. I am based in Vienna, and in continental Europe a lot of developments are driven by regulation, there is the European Union Sustainable Finance Regulation and there is the disclosure regulation as part of this which will force all European market participants to disclose their ESG policies at the first stage, and later metrics and data.

We have the European regulators, the Austrian regulator, the BAFIN in Germany, and they have published guidelines on how organisations should prepare/improve their governance structure, their processes and so forth. We are about to do a complete rework of our investment governance structures and investment processes, including ESG, sustainable finance, climate and thereon.

On the strategies and the vehicles, I would reiterate that a big concern is improving ESG and climate skills within your organisation. It comes back to what Amandeep said in that it makes a lot of sense to invest in renewable energies, but by doing so, you find out that a lot of these companies have a high carbon footprint. As of today, our carbon footprints are typically measured with Scope 1 and Scope 2 emission, but not necessarily Scope 3, and if you were able to include foregone emission because of renewable energy sources, things would change things dramatically. The first contact that an ESG investor makes is with ESG integration then carbon footprinting, but it needs to go beyond this. Things then become more complicated and you have to do much more work at the detail level to know what you and your organisation understands by this. Then comes the timescale, so if you focus longer-term, it makes more sense to include stronger Scope 3 emissions in your decision-making process than if you were just looking for some short-term strategies.