ESG investing needs an intelligence boost

Reducing the carbon footprint in a portfolio via ESG screening alone is a box ticking exercise

ESG

Just cutting carbon-producing companies from a portfolio is not the smart way to achieve climate change goals and more sophisticated approaches are needed, say ESG fund managers.

These should include an assessment on a company’s carbon emission practices, looking at the track record of a firm over time, and making ESG assessments an integral part of all investment allocation decisions.

Intelligence required

Lombard Odier Investment Managers head of ESG solutions, Robert de Guigné is one who feels that the UN sustainable development goal of keeping a global temperature rise to below two degrees Celsius simply can’t be achieved by investing only in renewable energy companies.

“You could reduce your carbon footprint in a straight forward way by excluding the energy material and utilities companies in a portfolio but is this a really smart way to do it?” he asks.

"If you’re just sticking to benchmarks and ticking the box, where is your responsibility."

“To transition to the two degree target we will still need some oil and some gas to be able to produce electricity – we can’t switch to renewables like that.”

De Guigné says that investors should instead favour firms in all sectors that have the best practices on carbon emissions.

“Your investment strategies need to go through this smart way and not just get rid of the most emitting and tick the [environment, social, and governance] box. There’s a lot of temptation to tick the box in the sustainable field.”

European Commission taxonomy

De Guigné also notes that plans by the European Commission to create a set of criteria to determine if an economic activity is environmentally sustainable could end up as a box ticking exercise if it was too simple.

“Firms will see it as an opportunity to sell more products. In our particular industry we have a very large sensitivity to benchmarking and we use it to hire and fire people,” he says.

“And if you’re just sticking to benchmarks and ticking the box, where is your responsibility? You’re just delegating all the methodology, all the thinking around sustainability to someone else.”

Self-motivation key

State Street Global Advisors head of equity portfolio strategies and indexing, Ana Harris says that the industry needed to move to self-regulated ESG disclosure.

“If we don’t do it then the regulators will force us to do it, but they might over shoot, and the frameworks can become a bit too narrow,” she says.

“I’ve heard that the European Commission is looking for opinions. They are talking to the industry, practitioners, asset owners and need time to develop the taxonomy to protect the consumer.

“At the same time to a certain extent there is freedom right now for investment managers to incorporate it in their own way into their investment beliefs.”

Box ticking versus ESG integration

Harris tells our sister publication Expert Investor that while certain investors and asset houses had already incorporated ESG as a box ticking exercise, this was slowly changing.

“As more evidence of impact (investing) grows, we can also convert a few of those sceptics but the majority of people are slowly but surely understanding the benefits of ESG in the long term,” she says.

Harris says when selecting ESG funds, buyers should be looking at the track record of ESG improvement by going beyond the labels attached to the fund, look at the resources an asset manager was putting behind ESG, and whether it was a focus of the firm or just an add-on, and also look at the thought leadership surrounding the topic.

Mathieu Maurier, Luxembourg country manager at Societe Generale Securities Services, sees the way forward as a move to integrating ESG factors into all areas of asset management.

“In the next five to 10 years the amount of assets under management being screened for ESG factors, I would say will be 100% as opposed to a separate strategy like today.

“If you’re asking millennials what would make them invest in something, they will do that as long as there is a meaning behind it. And the industry will have to have the capacity to response to the question, ‘what is the meaning of my investment?’.”

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