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Lessons from global ESG leaders

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By Sarah Bratton-Hughes
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4 minute read

Major asset owners around the world recognise that ESG considerations need to be systematically factored into investment decisions. Not only are many receiving increasing pressure from their members, but institutional investors know ESG factors are an important determinant of pre-financial risk and potential opportunity.

As environmental, social and governance (ESG) investing has moved mainstream, the debate around which approach to ESG investing is better or more appropriate also persists. And there is the spectre of greenwashing as companies and fund managers seek to jump on the ESG bandwagon and label any and all funds “ESG. 

Institutional asset owners in the Nordic region and the Netherlands have been operating in the ESG space for decades and are often seen by the investment community as leaders in sustainable investing. Therefore, it would be reasonable to seek the opinions of these leaders around current issues within ESG investing.  

Recent research surveying some of the largest asset owners that invest in listed equities through third-party managers in the Nordic region and the Netherlands revealed interesting findings.

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Room for improvement

Asset owners are clearly committed to sustainability but are largely dissatisfied with the current state of ESG reporting from asset managers. Asset owners were asked to identify the most important elements of ESG reporting, with the top three identified as: reporting on progress and outcome of engagement activities (82 per cent); reporting on greenhouse gas intensity (71 per cent); and reporting on carbon footprint (68 per cent).

Asset managers also need to continue to prioritise engagement with companies in terms of understanding their ESG processes and holistic investment process. One asset owner said, “Engagement is the way to change the world.” There is just no shortcut to good, old-fashioned due diligence. It is the quality, not quantity, of meetings that is important. In fact, if the number of engagements was a top criterion, it would be relatively easy for an asset manager to “game the system” by sending brief, perfunctory emails to the management teams of every company in the portfolio. 

Rather, it is much more important for investors to ask managers detailed questions about what they have done to monitor companies on specific issues. It is also important for investors and asset owners to understand how managers establish processes and timelines for taking remedial action with companies and what those remedial actions might look like —  e.g., proxy voting on issues or, in worst-case scenarios, when divestment is appropriate.  

In a nutshell, investors are looking for clear escalation when companies do not meet targets. 

US versus the ESG world 

As long-term stewards of our clients’ capital, we believe that by systematically incorporating ESG risks and opportunities, we can potentially deliver better long-term outcomes for our clients. And while some might claim that ESG risks are non-financial risks, we see them as pre-financial risks that can be a forerunner of financial underperformance. We believe that we are in the midst of a paradigm shift in investing and how we have historically valued companies is different from how we are going to value them in the years to come.

In fact, over 90 per cent of the market value of the S&P 500 Index is covered by intangible assets, such as brand image and intellectual property that depend on reputation and engaged employees (this is up from only 13 per cent in intangible assets in 1975). With this in mind, it is more important than ever to incorporate ESG into the investment process.

However, there is also a perceived growing hostility towards ESG investing in the US by much of the rest of the world. Much of the pushback we have seen to ESG investing in the US is at the state level, where some state treasurers and comptrollers are concerned that the financial services industry is blanket boycotting fossil fuels. That primarily affects exclusion/screening strategies.

In our view, the integration method is ideal as it doesn’t exclude companies that are on a positive trajectory and can deliver Alpha-plus. Also, you can’t engage with a company if you don’t own its stock. And if you don’t own the stock, you won’t benefit from the increase in share price when it does make progress on the ESG issues that matter to investors.

There is a lot to be learned from the Nordic and Netherland forerunners in the ESG space and while some of the rest of the world catches up, or unfortunately falls behind, responsible investment managers know that sustainable and ESG factors cannot be ignored, and should be prioritised, when looking at companies to invest in.

Sarah Bratton Hughes, head of sustainable investing, American Century Investments

Lessons from global ESG leaders

Major asset owners around the world recognise that ESG considerations need to be systematically factored into investment decisions. Not only are many receiving increasing pressure from their members, but institutional investors know ESG factors are an important determinant of pre-financial risk and potential opportunity.

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