Sean Thompson, Managing Director, CAMRADATA
Responsible Investment factors are transitioning from being ‘nice to have’ to being an integral part of the investment process. Asset managers have woken up to what investors are demanding, However, globally, the implementation of responsible investing has been far from homogeneous.
Our latest whitepaper on Responsible Investing entitled, ‘Not all approaches are created equal’ looks at why this is the case and the latest global trends in responsible investment. It shares insight from investment managers who attended our recent roundtable on this theme.
Europe is leading the way on Responsible Investment, with institutional investors looking beyond financial returns to make impact investments in order to contribute towards a sustainable future. As a double act, alongside asset managers, they have the power to drive corporate change and prioritise people, profits and the planet.
The USA and emerging markets are lagging Europe and consequently, the scale of integration of responsible investment across companies and regions varies greatly. However, there is still some debate around whether Environmental, Social and Governance (ESG) factors will lead to higher profitability and only time with tell.
Key drivers of responsible investment
ESG issues in investment management are rapidly becoming mainstream. The number of resolutions at AGMs on climate change has doubled in three years, challenging Big Oil to hasten its transition to renewable energy.
Asset owners notably pension funds, face ever more regulatory requirements to enunciate their policy on climate change. Additionally, since the publication of Thomas Piketty’s Capital and the MeToo movement, asset managers are increasingly incorporating social and gender equality into their strategies.
Another key driver is that regulation pertaining to ESG is rising. UK pension funds will have to make policy statements from October that consider climate change in their investments. Car manufacturers in the EU also must show they are reducing noxious emissions from their vehicles.
In the USA, Democrats are pushing for legislation that would more than double the federal minimum wage over five years. These are just some policies that affect companies and the investors who finance their activity, but they all matter as ESG issues.
Evaluating the impact of such issues and the opportunities for responsible investment will increasingly be the focus of investors and their advisers going forward. Here are some of the key trends in responsible investing highlighted in the whitepaper:
Adoption is uneven
Sustainability is an issue for all companies, even traditional sector leaders and those in emerging markets but different companies have different approaches in terms of responsible investing. For example, Swiss private bank, Lombard Odier, has constructed its own, three-pillar scoring methodology, which is part of all portfolios. At Newton Investment Management in London an aggregate score of 4 out of 10 derived from various ESG metrics is the threshold for including companies. Individual managers can bring in lower-scoring companies to their portfolios but need to justify how these companies are going to cross the threshold in the future.
Historically, ESG was realised in portfolio management by means of negative screens, typically applied to “sin” stocks such as tobacco, gambling and alcohol. It’s generally accepted that negative screening remains germane to several responsible investors. But the asset managers’ way of working demonstrates that while screening continues in defining parameters, it is less significant within the process than more holistic, positive and forward-looking analysis of enterprise
Stewarding client assets
Stewardship is a vital element to stockholding and consultants are looking for asset managers to demonstrate how they steward companies. Consultants need to challenge the ESG credentials of an asset manager by asking direct questions and ensure that the integration of ESG issues are authentic: well understood, well settled and well socialised in the organisation.
Commitment and clarity of goals
The degree of influence exerted by a shareholder or bondholder bears no correlation to the size of their holding. Belief in a cause will effect change, even though on profound issues, this may take time. Companies want to be seen to be doing the right thing, but there is the tragedy of horizons when it comes to global challenges, such as climate change.
For instance, the transition to renewable energy must happen, but there are financial pressures to deliver short-term returns. More than 70% of climate change has been caused by 100 companies but some are harder to influence.
Some consultants are sceptical of index-tracking strategies in terms of responsible investing. The concern is to what degree passive managers’ steward effectively when holding a rigid quote of share.
It is suggested that more than 50% of assets under ESG management were in index-tracking strategies, when different agencies have different indices. MSCI ESG alone has more than 300 Responsible indices which complicates fair comparison, while giving asset managers who don’t know how to do RI an easy get-out.
It was argued that asset managers and their clients need to get to grips with the different methodologies and hierarchy of criteria. For example, US electric car manufacturer, Tesla, was rated very differently by three major agencies. MSCI ESG, which looks for impact, scores it as a top company. FTSE, which prioritises disclosure, rates Tesla low. Meanwhile, Sustainalytics, ranks the carmaker somewhere in the middle.
To read more insights into responsible investing download the whitepaper here.