Interview: “It’s more than just ESG-integration”

Northern Trust’s Marie Dzanis, head of asset management, EMEA, and Julie Moret, global head of sustainable investing and stewardship, talk to Benjamin David about the interconnected nature of ESG.

Funds Europe – In recent months, in your press releases, Northern Trust says it has more than 30 years of sustainable investing, experience and innovation. I’m curious to know more about the sustainability element of the business. When did that start, and where are you today?

Marie Dzanis – Northern Trust Asset Management has prioritised sustainable investing for three decades. Moreover, we have dealt with large, sophisticated institutional investors looking for solutions in the sustainability space for over a decade. In pensions, we serve Amsterdam [and the] Nordics, and the relationships we have in the UK and Ireland are evidence you need a certain calibre of authenticity, experience, expertise, longevity and clarity in delivering investment solutions, particularly as it relates to ESG.

Julie Moret – The firm started in the late 80s, managing a purview of exclusionary norms and values. Our growth as a business reflects how the industry and our clients’ expectations have grown from exclusionary norm values to a much more holistic integrated approach to ESG.

The first decade of the business was managing predominantly exclusionary form mandates. The second decade of the business grew the substantive Emea investment practice around sustainability, working closely with several large strategic clients to develop custom ESG solutions and strategies. Finally, the third decade sees the business reaffirming the investment case for ESG, that ESG goes beyond product capabilities since it involves tapping into a wider pool of information that includes both the risk-management signal and a potential alpha-generation signal.

Regarding the responsibilities of overseeing our sustainable-investment practice and platform, there are three core priorities. First, bringing in-house the best-in-class ESG data set. Second, focusing on crucial ESG themes: one, a climate-specific focus on decarbonisation, and two, biodiversity, particularly water diversity. Third, human capital diversity, equity and inclusion.

Funds Europe – ESG was an important issue at a recent Northern Trust Outlook session, with a key theme being ‘sustainable investment, reaching the next level’. What do you mean by ‘reaching the next level’ and why it is a key theme?

Marie DzanisDzanis – Key business themes intersect with ESG. We work with clients by helping them interpret regulations and find solutions. We must surround our clients differently, and the conversations on investors’ goals are robust. Part of that involves the magnified need for a voice in the industry. The other thing that’s critically important for us to work in this environment is a more strategic, long-term focus on how our clients see their business evolving.

The other thing at play here is that the younger generation plays a big part in the desire for sustainable investments. Investors vote with their values and put their money where it can create an impact – and this younger generation, particularly with a large wealth transfer coming in 2035 and beyond, will be looking for investments compatible with their personal beliefs. Since we have clients at different stages in their ESG journey, we have an opportunity to educate the industry and remind clients there is a solution for them.

Funds Europe – A recent study by Northern Trust, called ‘ESG’s Impact on Institutional Investing’, found that 89% of asset managers and 79% of asset owners across Emea and America identified collecting and analysing data as a top challenge in incorporating ESG into their investment process. So, how might investors address this challenge?

Moret – The study came from our asset servicing side of the business. There are important practicalities that any investor can undertake to solve this challenge. First, you need an infrastructure within an organisation to ingest all this data operationally and efficiently. There’s a lot of data from asset managers from different vendors, forms and scoring mechanisms. To make that data usable, the built infrastructure must allow one to ingest that data into the workflow of the investment staff because you need to embed it within the natural workflow. Second, you need access to the raw data components because that allows asset managers to create their own proprietary, differentiated views.

There are two industry-led taxonomies the industry is coalescing around worthy of noting: the Task Force on Climate-Related Financial Disclosure (TCFD) and the International Sustainability Standards Board (ISSB). We’ve ingested multiple raw ESG data sets and assessed companies using a TCFD and ISSB framework. We’ve extended TCFD and argued that there’s more to it than just climate. You can apply this to corporate governance and societal elements. Thus, we use that to provide our own proprietary score. A part of that is solving the over-saturation of too many frameworks.

Funds Europe – In Funds Europe’s September 2022 ETF Report, a central theme was gas and nuclear’s inclusion in the EU taxonomy, with European commissioners facing accusations of greenwashing. What impacts have you seen this inclusion have across Europe?

Dzanis – Having well-defined investments, well-defined regulations and clarity are essential for an asset management community moving forward. There is a standard view that sustainable investing is only about exclusion, but this view has to evolve. For example, consider the categories of equities, fixed income, debt or units of risk – by combining them with the outcomes you’re trying to get, you better clarify which categories you will have potential issues with. Thus, inclusion and combination are essential methodological components. And as you’re assembling a portfolio, it makes it easier and clearer to roadmap the outcomes you want to achieve.

Moret – There is a lot of variation in viewpoints across the EU concerning whether gas and nuclear are responsible or sustainable energy sources. We must acknowledge that, as of today, approximately 80% of the energy source or the energy mix is still predominantly fossil fuel-dependent. We also see the levelised cost curves – a general monotonic downward trend – of renewables such as solar and wind coming down, making them more economically viable. Power density is a challenge, though. The strength of the power to fuel specific industrial production processes needs to match alternative energy sources like nuclear and gas.

Everyone’s talked about the IRA – the Inflation Reduction Act in the US, seeing $370 billion towards sustaining green renewable energy sources. In addition, the European Commission recently came out with its equivalent of the IRA, the Net-Zero Industry Act, to support the green energy sector. All of this reflects a drive to support alternative energy sources to bring them to scale.

Funds Europe – Many in the financial industry have been concerned that shelving the EU’s social taxonomy might be all gloom for the financial sector. What are your thoughts on this?

Dzanis – From the client’s perspective, institutions that prioritise accessing the green ‘G’ or the social ‘S’ will be dialled up or dialled down in their mandates. As already mentioned, we spend a lot of time upfront identifying the key outcomes clients try to achieve. So, the shelving presents familiar challenges to us. Globally, there are lots of challenges around ESG, and as global asset managers, we work hard to calibrate definitions for our clients when considering building or creating investments.

Julie Moret

Moret – You can’t disassociate the ‘E’, ‘S’ and ‘G’ into separate verticals. They are interconnected. When you think about where we see the ‘S’ and ‘G’, it’s evident that you need companies with strong corporate governance standards. A well-run and well-managed business that understands its externalities will have a good handle on how we need to manage environmental and social issues that could lead to value disruption, asset impairment and reputational risks. Thus, corporate governance is central and a business foundation. In our ongoing client discussions, a vital component is ensuring that there’s just transition around decarbonisation. So, for those sectors that may be more risk-exposed, we ensure that there is an allocation of human capital and retraining reskilling. The ‘S’ is those areas that will accentuate, because it’s challenging to look at them in a vertical way when the list is, by its nature, interconnected.

Dzanis – In a well-run company with good processes, they’ll consider having well-skilled themes and diversity. They ensure their business represents their community, environment or the people they serve. These conversations are substantive because all the elements need to be tied together. Of course, they should focus predominately on diversity or executive payments. But again, when done well, all these elements will be interconnected, and interconnecting these elements well is a future-looking indicator.

Funds Europe – What companies globally do you think have done well in their ESG performance and why?

Dzanis – The more significant question here is what trends, sectors and areas are opportunities? Average indices have come down in their carbonisation over time. That’s important to our clients and the industry, realising the need to reduce carbon and factoring that into risk parameters. So, we consider indexes overall and how we’ve made traction in getting governments to fund green environment initiatives. The EU Recovery Fund, for example, had two outcomes. One was the digitisation of the EU, and the second was green recovery.

Moret – We’ve got an eye on systemic issues that translate into systemic risk across the market. We use an industry materiality map – we assess the most business-relevant ESG issues and topics on an industry-by-industry basis. We translate ESG issues into channels of financial impact and consider areas such as how much of a company’s business operates in areas of high, low and medium water stress and how much of their operations are recycled water.

As I mentioned, water diversity is one of our strategic engagement themes. By 2030, estimates say the world will require 40% more water than it does today. The projected decline in freshwater usage impacts material risks across various sectors, not just agriculture, but utility, textile, steel, cement and extractors.

Thus, it is about more than just ESG integration. It’s about how we bring our voice to the companies we invest in to raise ESG standards, using our voice and engaging – not just corporate engagement, but industry engagement where we have opportunities, policies, regulation and consultation.

© 2023 funds europe



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