How do institutional investors feel about ESG?
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Issue #94: A weekly update on responsible investment.
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\\ Weekly Insights \\
Last week BNP Paribas published their Global Survey (download here) where they dove into institutional investors’ attitudes linked to ESG. If you want to get a good sense of how large institutional investors think about ESG today / where it is going in 2 years time, this is a great read.
For this week’s issue I’ll show a few data highlights:
What are the top motivators for ESG investment?
- Brand and reputation
- Improved long term returns
- External stakeholder requirement
- Decreased investment risk
What are some specific investors saying about their motivations?
“Both returns and reputation are important. However, we’re focused on the material impact og ESG factors on cash flows and valuation. A more robust assessment of risk means improved identification of opportunities, which, in turn, leads to enhanced financial outcomes. So ESG considerations provide incremental assets within a portfolio manager’s toolkit.”
- Michelle Dunstan, AllianceBernstein
“If the sustainability risks are becoming more material, then the asset management industry is more likely to move itself, rather than wait for regulation or the right dataset.”
- Hans Stegeman, Triodos Investment Management
“Much of the drive to incorporate ESG has come from our members; they have very high expectations of us. We try to stay ahead of their needs given we’re conscious it’s a fast-moving space and something which may have been sector-leading two years ago would be quite dated today.”
- Sybil Dixon, UniSuper
What remain the biggest barriers to ESG integration?
- Data quality and consistency
- Inconsistent data between asset classes
- Conflicting ESG ratings
- Ineffective data for scenario analysis
What role does ESG play in your company’s investment strategy?
How is ESG incorporated across asset classes?
How have Net Zero commitments evolved?
- 19%: Yes, at firm level covering all asset classes and investments/funds and inclusive of risk monitoring and temperature scoring of portfolios
- 18%: Partially, a key subset of our ESG-aligned portfolios are aligned to a 2050 net-zero target, covering all the asset classes held by these funds, and inclusive of risk monitoring and portfolio temperature scoring
- 27%: We have no such commitments
- 31 %: Early stages; We are still exploring the steps necessary for our firm to set a 2050 net-zero emissions goal
- 5%: We have made a commitment to achieving net-zero emissions across all of our investments by 2050 but have not begun to make capital reallocations
Where are the greatest priorities for technology investment?
67%: ESG Reporting / Disclosure at all levels (company, portfolio and fund)
53%: ESG data aggregation / analysis
36%: Increased granularity and detail for ESG specific data for research
22%: ESG index creation and tracking
\\ Nossa News \\
Respond to this year’s Workforce Disclosure Initiative!
Nossa Data is the official technology partner to the Workforce Disclosure Initiative, an ESG standard growing in popularity among many of the world’s largest public companies. This year’s response is due on October 29th, 2021. If you are a public company and interested in submitting a response to the WDI, get started by emailing us at wdi@nossadata.com
\\ Top Stories \\
ESG Critics Continue to Miss the Mark
Sustainable investing isn’t about sorting companies into “good” and “bad” buckets. Criticism of sustainable investing is often based on the assumption that ESG is a simplistic process of sorting companies into two buckets, one containing “good” or “virtuous” companies and the other containing “bad” companies. An example from this week began this way: “The starting point for the ESG argument is the premise that we can come up with measures of goodness that can then be targeted by corporate managers and used by investors.” ESG is about identifying quality companies that understand the importance of incorporating a greater focus on the material ESG issues facing their businesses and embedding sustainability into their decision-making and long-term strategy. Jon Hale on Medium.
7 Principles for ESG investing
- Have Clear Criteria For What Is Meant By An ESG Product
- Choose Your ESG Data Vendors Carefully
- Develop A Rigorous Process For How You Aggregate These Data
- Have An Integrated Process For Constructing ESG Products
- Ensure That You Are Authentically Walking Your Talk
- Identify And Manage Conflicts
- Ensure Proper Governance At All Levels of the Organization
BlackRock losing ‘patience’ on pace of corporate ESG disclosure
“We don’t have patience much longer for these disclosures to be forthcoming, we are increasingly seeing the impacts of climate change not only across our portfolios but also across the global economy.” Said Jessica McDougall, a director for investment stewardship at BlackRock. As increased regulation and investor comes into the market, companies may be required to disclose both qualitative and quantitative details, including how they manage climate-related risks and opportunities day-to-day operations and in broad strategy. If a boardroom shrugs off sustainability concerns among stakeholders this may jeopardize its company’s reputation and financial prospects.
CFO Dive.
ESG is broken but we can’t afford to scrap it
A rebuttal to Tariq Fancy’s article on the challenges related to ESG. The author goes over each of the points / problems Tariq Fancy outlined and shares how other stakeholders in the market are working to fix those specific problems. For example, one problem he emphasised was lack of standards on the market. The article rebutes: “ clearer standards are starting to emerge. The EU’s new Sustainable Finance Disclosure Regulation requires all EU asset managers to publicly disclose both climate risks to financial performance and any adverse impacts investments have on environmental or social factors.” In the US, the SEC has established a task force aimed at developing clearer legal standards in ESG.
Quartz.
ESG: What about delivering workers’ rights?
Despite an increased focus on the ‘social’ side of ESG, many fund managers seem reluctant to side with disgruntled staff at companies such as Amazon, where labour-related controversies are commonplace. “It takes a lot of courage to divest from Amazon; it’s such a lucrative stock,” says Roxana Dobre, associate director, consumer goods research at data provider Sustainalytics. Sustainalytics has classified Amazon as a high ESG risk. Among the primary factors contributing to its ‘controversy level’ are labour relations, human rights issues, accounting and taxation, as well as anti-competitive practices.
Funds Europe.
Bridgewater and PGGM discuss ESG’s need for better communication
ESG investment needs to answer two key questions: 1. Does ESG investment impact financial performance? 2. Does it have an impact on real world sustainability outcomes? Only clear communication on these two critical points (and the answers may well be negative) will help counter growing criticism that the financial markets should not be tasked with solving the problem of climate change. The conversation evolved to discuss: In three-dimensional portfolios impact sits alongside risk, and all types of capital can be placed on an impact spectrum, said Stendevad. At one end impact investment can reveal additionality and causality attracting different types of capital like VC and green tech. At the other public, liquid market investors can also invest for impact. “It is not just high-risk capital that is needed,” he said. Impact is a spectrum and all capital plays a role.
Top 1000 funds.
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\\ Paper Highlight \\
Decarbonisation Factors: The Journal of Impact and ESG Investing0
By Alex Cheema-Fox, Bridget Realmuto LaPerla, George Serafeim, David Turkington, and Hui (Stacie) Wang.
What is the paper about? In this paper the authors examine the construction of decarbonization factors. These factors have much lower carbon emissions but differ significantly in how much they reduce their exposure to carbon emissions. The authors note stronger positive alphas in Europe compared with the United States in the sample collected. They find a strong positive relationship between decarbonization factor flows and factor returns across most decarbonization strategies. The decarbonization factors perform consistently well, delivering positive and significant alpha, when contemporaneous flows are positive.
Background on Climate Change: The increase in carbon emission concentration has given rise to several physical effects that impact businesses, the economy, and investors’ portfolios. It has already led to an increase of 1°C in average global temperature since 1880 and an average sea-level rise of more than 2.6 inches, with the rate of annual increases accelerating — a phenomenon that is particularly important given that approximately 3 billion people, about 40% of the world’s population, live within 200 kilometers of a coastline. By 2025, that figure is likely to double, given urbanization trends.
Investor Responses: Against this backdrop, an increasing number of investors are assessing their portfolios against climate-related risks and opportunities. Moreover, new products are being launched to offer options for investors that seek exposure to portfolios with a lower carbon footprint.
Decarbonization strategies: Most decarbonization strategies seek to limit the carbon profile of the portfolio by underweighting high-carbon-emission companies and overweighting low-carbon-emission companies. Carbon emissions are measured as the sum of direct and indirect carbon emissions. The former, Scope 1, are the direct carbon emissions generated by the operations of the company and the latter, Scope 2, are the carbon emissions generated by purchased electricity. Scope 3 emissions, which include emissions outside the boundaries of operational control of a company either downstream, generated by product use by the customer, or upstream, generated by a company’s supply chain, are not typically considered.
\\ Leading Across ESG \\
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Julianne Flesher
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