Magazine Issues » November 2019

Sustainable investment: A fresh source of French ESG

IngredientsFrench asset managers could be pioneers in the adoption of ESG investing, but the country’s firms – like its regional cuisines – boast their own distinct styles. Romil Patel gets a taster.

A number of French managers use environmental, social and governance (ESG) investing criteria as they seek to be accountable in the eyes of the world and future generations. This means embedding ESG applications as far as possible in the investment process and strongly voicing their investment beliefs and principles.

In order to change the way business is done, Amundi – Europe’s largest asset manager – has committed to integrating ESG criteria across all its funds and corporate voting practices by 2021. This means “having an overview of [a corporate’s] extra-financial information and making sure that it’s always part of our investment decisions”, says Stanislas Pottier, chief responsible investment officer at Amundi Asset Management, speaking to Funds Europe on a crisp Parisian morning.

But fully integrating ESG into assets totalling €1.5 trillion ($1.6 trillion) is no mean feat. To do so, Amundi has forged partnerships in certain asset classes where, for all its expertise in common equities, it could benefit from additional insights. These partnerships have led to sustainable products, intended to meet client needs while supporting a decarbonised, habitable world.

Unite behind the science
Five years ago, Amundi partnered with EDF Group – a “global leader in low-carbon energy”, EDF calls itself – and created a joint asset management company to finance projects relating to the world’s energy transition.

“We recognised that in the infrastructure asset class, neither we nor our clients knew so much,” explains Frédéric Samama, head of responsible investment at Amundi. “Instead of recruiting hundreds of people and reinventing the wheel, we decided to partner with EDF in order to access their skills through a unique partnership.”

Through this partnership, Amundi has been identifying often-neglected small projects and gathering them into funds, Samama says. In many cases, these projects are in the region of €1 million each.

Amundi has also employed a buy-and-hold approach to these assets as opposed to selling them off in five years. Why’s that? “Because it helps the corporate and suddenly it becomes a bond-like product for investors,” says Samama. “They know they will have very regular cash flows for the next 15 years, so they can plug that into their portfolios as bond-like – but with the illiquidity premium.”

In 2017, Amundi struck another partnership with the CEA, France’s alternative energies and atomic energy commission, to create an independent asset management company called Supernova Invest. This aims to identify green start-ups making breakthroughs in energy.

A lifecycle view
Once knowledge is unlocked, the imperative is to apply it to the development of financial products across a range of asset classes, including real estate, where Amundi manages some €31 billion. This asset class requires a particular ESG methodology, given the physical risks that buildings face – damage from tornados and the rise in sea levels, to name but two.

In addition, for real assets in the building sector, today’s asset managers must consider the entire lifecycle of a building for full assessment of its carbon footprint. It’s not simply a case of studying a building’s usage and energy efficiency. If the building requires an upgrade, that should be accounted for in negotiating the price.

Aside from the physical risks of a building, laying claim to ESG integration means that social issues must be considered alongside environmental concerns. This part often presents greater complexities, as indicators may vary across geographies, cultures and priorities. By contrast, climate is a global issue with widely accepted indicators.

Channelling equitable solutions
Many of the countries that are feeling the impact of climate change, or will do so in time, are emerging market nations, which have traditionally been subjected to a misallocation of capital. There are huge pools of assets in developed markets – a stark contrast to the huge need for green infrastructure in many emerging markets.

The fact that there is no bridge between the two worlds is costly for both parties, because it means that developed markets are not benefiting from the returns associated with emerging markets, while the latter do not have access to the capital flows that stimulate growth, employment and the protection of people. So, what reconciliatory measures have been taken?

Samama heralds a moment of genius from the International Finance Cooperation (IFC). “They said: ‘Instead of directly financing the infrastructure that nobody knows anything about, let’s use banks as an intermediary.’”

Banks sit between the asset owners and infrastructure. They could issue green bonds for project finance, he says.

“We as buyers are very comfortable because we know that banks are well regulated. So, we have an asset that we are comfortable with. By issuing the green bonds, the banks are committing to channelling the money towards green infrastructure, so we are decoupling the risks that we are taking from the capital flows that are going to green infrastructure.

“We then attracted Swedish and European investors that have never invested in emerging markets and channelled their money to green infrastructure,” Samama adds.

It is this type of financial innovation that has the potential to work for all parties. Investors can enjoy good returns and simultaneously address the wrong allocation of capital by creating the right vehicle that correctly channels money, with society as the ultimate beneficiary.

Among investors, there is an increasing recognition that tomorrow is now. So, what are society’s current demands and are they being reflected in investment practices?

A delicate balance
Global protest movements to keep fossil fuels – which have powered the world we live in for decades – in the ground have been gaining momentum recently. Indeed, a court case last year, The People of the State of California v BP et al, acknowledged that the defendants cited were collectively responsible for more than 11% of the carbon and methane pollution that has accumulated since the Industrial Revolution.

While society demands drastic action, the consequences of an immediate halt in production would be far-reaching. So, how can investors pragmatically bridge the divide at the same time as ensuring and helping to manage a low-carbon transition?

BNP Paribas Asset Management says it is trying to encourage companies to adapt their strategies to a low-carbon model. The firm “will not invest in oil companies where we do not have an ESG score – and that is a prerequisite”, says Pierre Moulin, the firm’s global head of products and strategic marketing.

“If there is no ESG score, we will ask our teams for proof that they have conducted ESG qualitative analysis of their investment – and this is for all our investments,” he adds.

Likewise, for OFI Asset Management, removing thermal coal from the scope of investment was a relatively straightforward decision. It becomes trickier when you start going into oil and gas companies, for instance, and explaining that some of them are shifting their business models while others are not.

This can be applied to all sectors, says Eric Van La Beck, the firm’s head of socially responsible investment.

“For instance, a major aluminium company also happens to be one of the biggest emitters globally, but they have patents and know that by 2022, they will make aluminium without emitting CO2.

“This is why the explanation to the general public is hard to build. It’s not easy to make people understand that this is where we want to go, but today you still need some industries where there is no substitute, so you will invest in those who make their best efforts,” says Van La Beck.

ESG is very much a mainstay on the menu of French asset managers. By adapting and refining it, they hope to produce the optimum result.

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