It’s been the subject of much conjecture, and some criticism, since then, but the global pandemic has made the use of environmental, social and governance factors in investments a standard – and expected – practice.
The need and the readiness for ESG are clear. Any self-respecting asset manager, investor or broker will have people that specialise in the topic and, at least, claim to integrate ESG into their investment decisions. While not everyone is at the same level of development, and some of the implementation might still require fine-tuning, the basics are now here – at long last.
There is no doubt that 2020 brought with it many challenges, both socially and economically. Sustainable funds and sustainable exchange-traded funds (ETFs) outperformed, particularly during the downturn. This was mainly driven by a size and sector effect – sustainable funds have less exposure to “old” capital-intensive industries such as energy, and more exposure to technology, healthcare and the more innovative industries that profited during the COVID-19 lockdowns.
In addition, the concept of active ownership is now paying off. In 2020 alone, Robeco had 941 engagement activities with 222 companies, and was able to close 67 per cent of our engagements successfully. For example, we closed our auto engagement theme with nine car manufacturers in the US and Europe, with a 66 per cent success rate. The engagement was designed to encourage companies to innovate for a low-carbon transportation future, ensure effective quality management and impeccable product quality, and increase transparency on lobbying activities. Cases were closed successfully when a majority of these targets were met.
We’ve also recently conducted a series of feedback sessions on sustainability with major global clients. ESG has been put firmly on the agenda of our clients’ management boards. The fact that ESG has become mainstream has become clear, since most of our clients have a specialised sustainability/ESG committee in place, to whom operational responsibility for implementation of ESG policies is delegated, while the ultimate responsibility for policy setting and oversight remains at executive board level.
The use of exclusions/negative screening to avoid doing harm is widely accepted and, next to regulation-driven exclusions such as controversial weapons, values-driven categories like tobacco and thermal coal has now been added to the list by many investors. The use of financially material ESG criteria has become standard practice, and many now want to move beyond the mere adoption of relevant extra-financial ESG information in the investment due diligence process and set increasingly higher requirements on the portfolio composition in terms of sustainability metrics.
Given the lack of opportunities to get pure exposure to “ESG solutions providers”, impact investing for many of our clients is limited to relatively small, dedicated strategies (often in private equity). Nevertheless, a growing number are looking at ways to bring impact investing to the core of their portfolios, by investigating how exposures to the United Nations’ 17 Sustainable Development Goals (SDGs) could be integrated into their existing investment strategies. The SDGs are a global call to action to end poverty and protect the planet.
Looking ahead, key ESG ambitions can be summarised into the following areas:
1. Climate change and helping mitigate the negative effects of global warming through reduced carbon footprints. Some investors are now explicitly committing to net-zero carbon emissions by 2050, and starting the process of devising Paris-aligned carbon pathways.
2. Further promotion of ESG integration by putting higher demands on taking financially material ESG criteria into account in investment strategies. Many investors cite the need for higher quality and consistency of ESG data to allow more reliable monitoring of their portfolios.
3. Clients are increasingly embracing impact investing by seeking societal benefits alongside acceptable financial returns, with the 17 SDGs providing a useful framework for the alignment of their ambitions with potential investment solutions. Although climate change is by far the top priority, the COVID-19 crisis has driven higher interest in social issues such as labour rights and equal opportunity as well.
Now that ESG has become mainstream, we can look forward to increasing knowledge, research, data and collaboration across many areas in SI. It’s been a long time coming, and we look forward to working with clients to help them achieve their investment goals sustainably.
Masja Zandbergen, head of sustainability integration, Robeco