Funds Europe – In June 2020, the US Department of Labor announced a proposed rule to prohibit pension plans from investing in ESG vehicles “when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives”. A number of asset managers have urged the department to reverse its proposal, with ESG increasingly being considered a vital risk-mitigation framework that is financially material and distinct from impact investing. What is your view?
Mascotto – The proposal is certainly not ideal, and not conducive to helping investors access ESG investment solutions. We made our comments heard via the Investment Company Institute. Playing devil’s advocate, the rule does at least recognise the pecuniary nature of ESG factors. Further, the proposed rule’s focus on not sacrificing returns and increasing risks appears in line with the growing consensus that ESG is a serious enterprise that does not deviate from the core objective of maximising superior long-term, risk-adjusted returns. In fact, the proposal may prompt corporate pension plan sponsors to start examining more closely the economic opportunities associated with ESG. For example, we see tangible growth opportunities in renewable energy, products to mitigate cyber-security risk, and the circular economy. Further, in the spirit of not increasing risk as the rule says, perhaps pensions may also look to ESG to help quantify risky exposures such as being long fossil fuels?
Schiendl – If I look at companies in the renewable energy sectors, there is a major benefit financially to invest here. If you look just on a year-to-date basis and compare the MSCI World Index to the MSCI Sustainable World Index, you will discover a performance differential of ten percentage points. I think we are at the beginning of a major bifurcation of different developments that will increase as we go more into the future.
We should be active investors here. VBV’s approach is if we do sustainable investing, and I am exaggerating now, but if you do it with the sustainable investing as just another activity strategy, that shall deliver a higher return than normal investment strategies without ESG considerations. In 2020 we should no longer see it as a conflict, but we should use our intelligence to pursue our ESG, climate and financial goals at the same time, and I believe this is possible.
Marshall – I don’t disagree with Gunther’s assessment or analysis of what ESG can bring and the ability for an active investor to actually appropriate that rich information, interpret it in an intelligent way and gain an informational advantage over a competitor and thereby outperform over the long-term. From the perspective of an active fund manager, you could say in respect of the DoL proposal, ‘Well, it’s an opportunity for European investors, if US investors put the brakes on their ESG sophistication.’ But it’s a risk as well.
Our main focus as a UK institutional investor is more on the potential divergence between European and UK regulation going forward, but thankfully all the overtures that I’ve heard are about regulatory alignment, and frankly the greater risk is the volume of European regulation and requirements coming down the road. In terms of the US, if the Department of Labor continues to de-emphasise ESG, it might not be a direct issue for us (because the UK legislation is quite clear that ESG, when properly done, is part and parcel of your fiduciary duty), but it could have tail risks. For example, under the DoL proposal as drafted, a pension fund that is US-based and focusing on its fiduciary duty could continue make ESG allocations as long as they were done for risk and return reasons. What the proposal does is to limit the extent to which trustees could make “non-financial” decisions, i.e. decisions that don’t come back to risk and return rationales. What’s concerning is not so much the content of what’s written in the proposal but the effect it could have in discouraging risk-averse trustees or advisers from making the first kind of allocation (i.e. an ESG allocation for a fiduciary reason with an investment thesis at its heart). It could in theory stop US investors collaborating with us in company engagements and moving the agenda forward at the required pace, and it could affect the way that companies make disclosures if their shareholder base is mainly US. So, the DoL proposal has some tail risks, but they’re more indirect for us than direct.
Schiendl – The fiduciary duty in the US is purely a financial duty. Fiduciary duty in Europe is now financial and it is ESG and climate, and there has been a sea change that European legislation has done, changing what fiduciary duty means. In Europe, if a manager or even executive does not pursue ESG and climate considerations in their investment strategies, they might have the same legal risk that the same manager does who is based in the US, so there is a conflict just in the spheres of legislations.
Nazarova-Doyle – I don’t see them as two different things, so pursuing financial returns and pursuing ESG is exactly the same thing in my mind. ESG is additional data that is relevant in making financial decisions. Why as an investor would you ignore that additional data that you can take into account and make better decisions as a result? To me it’s all part and parcel of being better investors, and there’s a massive paradigm shift, at least in Europe – hopefully soon it will get to the US – around how we invest. We can now get this data and it’s getting better, so we take it on board and I think very soon there will not be that differentiation between ESG and non-ESG because fund managers will increasingly take that data on board and into account, and even passive investments will use that data to guide their stewardship to still enhance and preserve the value of those companies that they manage passively.
MacDonald-Brown – What is very important and difficult for everyone concerned is that it’s very easy to discuss risk and return, everyone understands alpha, tracking error and those targets, but it’s very hard to quantify a sustainability target or to put a sustainability aspiration on an equivalent footing with your risk and return targets. As a portfolio manager I can count on one hand how many of our clients have put anything other than risk and return in their investment management agreements. I hear what we’re discussing about the sea change, but when it comes down to this gritty detail, we are all still trying to work out what language as an industry we can use to assess people’s impact, with a little “i” as well as a big “I”, and so that’s the next evolution that will enable some of these conversations to move on. We have a clear methodology for talking about how we measure our impact with a little “i” and for a company’s behaviour, but that’s where firms and investment managers have an obligation to other people to be brave and say: ‘This is how you can hold me to account in the same way that you would hold me to account on a period of underperformance, and this is how you could hold me to account by not achieving what we had considered to be our sustainability targets.’