Inma Conde, head of ESG at Mediolanum International Funds, delves deep into the evolving landscape of ESG investing, discussing the challenges of measurement, the importance of transparency and the intricacies of exclusion policies.
How is the industry’s approach to integrating ESG factors into investment decisions evolving? And how does this strategy compare across the board?
The investment industry is undergoing a significant shift in integrating ESG factors, with an evolving regulatory landscape and increased recognition of sustainability’s importance in long-term investment viability. A notable distinction arises between direct investment entities and fund-of-funds operations. Most ESG frameworks and regulations are designed with traditional asset management in mind. However, fund-of-funds operations introduce another layer, wherein the engagement is primarily with other fund managers rather than companies directly.
This dynamic brings both unique challenges and advantages. Engagement in ESG, for example, takes on a different tone. Instead of direct dialogues with corporations, the conversations often involve an intermediary layer of fund managers. This intermediation can sometimes result in a more cautious approach since there’s a dependence on information flow and understanding from the underlying fund managers. It’s essential to foster trust and maintain open communication channels to ensure that the actual intentions and outcomes align with the overarching ESG goals.
Mediolanum uses detailed questionnaires to assess ESG integration by the investment managers they invest with. Moreover, ESG data from reputable sources, such as MSCI, Mercer and ShareAction reports, is analysed and blended to form its rating framework intuitively labelled the “three Ps”: Parent, Process and Portfolio. It’s also worth noting that as technology advances, AI and machine learning tools play a crucial role in analysing and evaluating vast amounts of ESG data, refining strategies and identifying potential risks and opportunities more efficiently.
With the growing industry focus on the environmental aspect of ESG, specifically climate-oriented sustainable development goals (SDGs), how is the broader industry aligning with these climate-related objectives, and what challenges are arising in the process?
The trajectory of ESG has been fascinating. Earlier phases saw a pronounced focus on governance and societal aspects, addressing issues like corporate governance in emerging markets and divestments from sectors with ethical concerns. Recently, the industry’s lens has zoomed in on the environmental component, especially climate change.
Europe stands out in its ESG endeavours. The synergy of robust regulatory directives heightened public awareness, and a proactive asset management community has galvanised ESG integration here. Notably, Europe’s approach to ESG is often observed to be more objective and less entangled in political discourses than in some other regions.
The concentrated focus on climate in Europe, driven partly by the EU’s regulatory measures, underscores the significance of climate-oriented investments. This concentrated approach has set a benchmark and presented challenges, especially regarding compliance, consistent standards and ensuring genuine, impactful integration over mere token gestures.
How does the industry view the importance of transparency and measurement, particularly in the context of the principal adverse impact indicators?
The emphasis on measuring and reporting in the ESG realm, especially in Europe, has significantly increased. This can be seen as a reaction to the past inconsistencies in ESG evaluations. In prior iterations of ESG, metrics were less standardised, leading to assessment disparities. Pioneering firms in the ESG space didn’t anticipate such an intense focus on measurement. The drawback is that while measurement is now prioritised, reliable and consistent data isn’t always readily available, making it challenging for certain operations like fund-of-funds.
Like many others, Mediolanum has opted for the principal adverse impact (PAI) statement and has emphasised climate change engagement with its managers. This involves engaging with companies directly and striving for tangible results. The outcomes of these engagements have been varied. The learning curve in the industry is steep, but by the end of 2022, there was a widespread acknowledgement of the importance of ESG metrics and understanding. The primary aim remains consistency in measurement, fostering intelligent discussions within the industry and progressing the ESG agenda.
Considering Italy’s recent legislation on exclusion policies, what might be the repercussions for the larger financial sector’s stance on responsible investment?
Exclusionary investing, or the practice of excluding certain sectors or companies based on ethical considerations, has evolved significantly. Earlier, exclusions were mainly rules-based, often tied to religious or moral beliefs. While initially perceived as merely removing “undesirable” sectors without adding investment value, the perception has shifted in recent years. Many now see exclusions as tools for aligning investments with specific E, S or G factors.
Mediolanum had to implement exclusions on controversial weapons due to Italian legislation. Generally, implementing exclusions in a fund-of-funds model can be complex, given the varying exclusion criteria of the different funds involved. Exclusions can be an asset when crafting specific ESG profiles for funds, but blended structures like fund-of-funds can introduce complications. Overall, Mediolanum’s approach to ESG is based on ESG integration within the investment process, as well as active ownership, engagement and proxy voting.
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