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From optimism to pragmatism: where now for ESG?
From optimism to pragmatism: where now for ESG?
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From optimism to pragmatism: where now for ESG?

23/07/2019

Lisa Beauvilain

Lisa Beauvilain

Head of Sustainability and ESG

Impax Asset Management

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David Harris

David Harris

Group Head of Sustainable Business

London Stock Exchange and FTSE

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Frank Roden

Frank Roden

Head of Asset Managers EMEA

BNP Paribas Securities Services

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We bring together a panel of experts from across the investment industry to look at the practicalities of ESG integration, how far the industry has come, and what lies ahead.

In recent years, our industry has been on an extraordinary journey. Just two years ago, BNP Paribas’ survey found that of those institutional investors integrating ESG at some level, only a minority of asset managers and asset owners invested more than a quarter of their funds in ESG strategies. Now, 75% of these asset managers and 62% of asset owners invest at least a quarter of their funds in accordance with ESG principles.

How can institutional investors best integrate ESG across their decision-making, and ensure they have the necessary tools, technology and talent to do so?

On 18 June, we hosted a panel session in partnership with Financial News Custom Studio to discuss how far ESG integration has come, and the opportunities and challenges that still lie ahead. Below are the key highlights of our expert panel, representing perspectives from across the active and passive investment industry.

Where are we now with stewardship and engagement - is it getting easier, are issuer companies more willing to engage? How can this apply in the passive investing world?

Lisa Beauvilain: There has definitely been a lot of progress, which is really encouraging. We have been actively engaging for more than a decade, and in the last 18 months we have seen great leaps forward. Suddenly we are pushing on an open door, whereas 10 years ago we would often hear the response ‘no, we are not going to report on any of this because it might be legally challenged’. We don’t hear that so much anymore. What we do get instead are questions; what do you think makes sense? Which of our peers are doing this well, and why, and please can you help us do this well?

David Harris: We have been doing some work with The Government Pension Investment Fund (GPIF) of Japan, the largest pension fund in the world, who became very interested in an index called FTSE4Good. What GPIF liked about FTSE4Good is that companies have to meet certain standards to get into the index, and then the standards get cranked up over time. Companies don’t just get ejected from the index if they fail to meet these standards, we contact them and they get a year’s notice to improve their practices in order to stay in the index. GPIF felt this was a very effective way to be able to engage vast numbers of companies.

Data should help to make ESG investment more scalable, and improve this consistency. Is this happening?

Frank Roden: Our short-term expectations of what data could provide are rather over-optimistic, but I think the industry under-estimates the long term impact. In our ESG survey, two-thirds of investors identified data as the biggest barrier to ESG integration. The issue is no longer availability of data as there are many tools and vendors offering this; it’s about the quality and the interpretation of that data.

Different data providers will use up to 200 factors across the E, S and G to come up with the scoring, and there is little correlation between these metrics. The important thing is to really drill down into those underlying factors and understanding what’s driving those ESG scores, and, today, this is a mixture of having the right resources (both people and technology), the right capabilities to do the analytics, and after that there will always be an element of subjective interpretation. 

DH: Indeed, there was a correlation analysis done of our FTSE Russell ESG ratings versus MSCI’s and the correlation was low, but in many respects this is unavoidable given the breadth of different topics included in the ESG spectrum. Metrics can include everything from tax transparency, to human rights, to climate change – the topics are so broad, not to mention the issue of determining what is material for an individual company, which may differ based on region or sector.

As the market is becoming more sophisticated, investors are questioning “how much does this overall ESG rating really tell me?”  You need to really dig into it and understand where the data is coming from, what is the underlying information.

There are also some interesting questions around estimation models.  Carbon data is probably the most frequently used; approximately 40% of large and mid-cap companies report their emissions data which, because larger companies and those in more carbon intense companies report better, makes up about 70% of emissions. That still leaves 30% of emissions which are being estimated, and all of these estimation models are different. The key is transparency; issuers need to explain and provide the information about how those models work, in the same way as ESG scores.

LB: The heart of the issue is to look at the material risks for a company. Looking just at sector, for example, does not necessarily lead to the right conclusions since even in the same sector, the particular issues flagged as material may be very different depending on the company. It really needs to be a company-level analysis, not at the sector level.

We quite often talk with our investee companies about the Sustainable Accounting Standard Board (SASB)’s materiality map, which is a good framework. This can help companies to understand the risks that are material for their sector, and work out which ones do and don’t apply

What is the industry doing to catalyse the adoption of ESG and overcome these challenges? What needs to happen next?

LB: Materiality is something that is very often mentioned within ESG, but there is a time aspect which might be quite different between regions and investors. The SASB approach is very much around the financial materiality and shareholder approach. In Europe we see more focus on stakeholder materiality, which looks not just at shareholders, but also other stakeholders, whether it’s employees, suppliers, customers, governments, or whatever other stakeholders a company may have. This is a more long-term approach than pure shareholder materiality, and I think there is increasing recognition that all companies would need to take into account all stakeholders, ideally.

In the longer term those companies that are truly successful and can be competitive over very long periods of time are those that take into account broader stakeholder materiality.

We have been advocating that sustainability should really come into annual reports. Companies and investors don’t always know how sustainability research and data is being used, but if this can be included in the annual report it will be elevated to a much more core position, especially if it is over the longer term and can be quantified.  

DH: One particular issue we see is regulators in different regions coming up with different standards, different approaches. There is a danger here of regional divergence.

Therefore, one of the things we have been making a big effort on is encouraging the International Organization of Securities Commissions (IOSCO) to play a role.  IOSCO helps join up regulators globally and comes up with global frameworks, which then regulators in each country can then use as a basis for their own regulations which can support global standardisation. 

It is important to recognise we are at a point in the evolution. There are going to be more enhancements and improvements, but it is not an excuse for inaction. We have enough to be able to start to consider ESG, climate risk, etc., in all portfolios, and we all need to work together to take this to the next level.

FR: We are part of the post-trade infrastructure that can provide an objective record of a fund’s investment history. If you take, for example, our role as depositary and trustee for investment funds, one of the things we do is run investment compliance checks to ensure that the fund is being run in accordance with the principles that are laid out in the fund documentation. Clients are looking for an objective, independent third party that can deal with this complex data to play back to them and show them what the portfolio looks like.  Are they hitting the performance targets for the reasons that they thought, and do they have the risk profile in that portfolio that they have anticipated?

ESG is not something we can just do on our own. We don’t have all the answers, the regulators don’t have all the answers. We are collaborating with a number of fintechs, and working with Cambridge University on various research programmes, so we all have to keep developing the optimum solutions together as well as working with regulators and other influencers to help guide us down the right path.

 

Read BNP Paribas’ 2019 Global ESG Survey here

With grateful thanks to Financial News.

Read more

The ESG Global Survey 2019 - Primary research into the practical implications of ESG integration

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