Your clients can profit while putting the environment first
The global focus on environmental, social and governance (ESG) factors when structuring investment portfolios means that your clients can invest for profit without sacrificing the environment. Presentations by two global fund managers to the Glacier International 2021 Webinar confirmed that incorporating ESG into investment decision making helps both to lower risk and identify opportunities for improved return. Sophie Thurner, ESG Product Specialist, iShares Sustainable Products at BlackRock and Chris Berkouwer, Portfolio Manager, Sustainable Global Stars Equities at Robeco, took turns to explain how their respective houses integrate sustainable investing, more often described as the E and S components of ESG, across their funds.
Investing for zero emissions
“Sustainability risks are an integral part of the investment risk landscape and integrating sustainability within portfolios helps investors to build more resilient portfolios and achieve better long-term risk-adjusted returns,” said Thurner. She added that climate risk, in particular, had become part of the mainstream thinking in the investment analysis world. Another reason that fund managers are spending more time on sustainable investment factors is that global regulators are shifting decisively towards the concept of a ‘net zero emissions’ economy. “We are also seeing investor sentiment turning in favour of sustainable strategies and we do not have any client conversations without ESG coming to the fore,” she said.
Berkouwer said that sustainability was integrated in every step of the Dutch-based asset manager’s investment process, though he conceded that the ESG concept remained poorly defined within the broader investment environment. “We integrate ESG in an intuitive three-step approach that involves identifying, analysing and quantifying its impact on an opportunity,” he said. Most asset managers will identify the ESG factors that are most material to a particular industry and use a variety of investment lenses to create a valuation model that ultimately impacts on decision making. Robeco uses two tools to identify these factors. First, a bottom-up ESG Dashboard that focuses on specific questions aimed at identifying red flags from an ESG perspective. Second, a Materiality Framework, which is a top-down way of identifying the most material ESG issues for a particular sector.
Equal consideration for active and passive strategies
BlackRock has worked hard over the past years to build a sustainable platform across both index and alpha solutions, across asset classes and across building blocks to achieve different levels of sustainability integration, and thereby meet the needs and preferences of investors. The asset manager focuses on two investment buckets to achieve sustainable outcomes. “The avoid bucket centres on the exclusion of controversial business activities and companies that benefit from such controversial activities via the application of a set of baseline screens,” said Thurner. “Our advance bucket consists of a variety of strategies with different levels of ESG integration”. This includes broad strategies with explicit ESG objectives; thematic strategies focusing on particular E, S or G outcomes; and strictly-regulated impact strategies that seek to generate positive, measurable results.
The impact of a strict exclusionary strategy, by not investing in shares in the avoid bucket, is not as extreme as one might expect. BlackRock’s ‘ESG Screened’ strategy is based on a 2018 assessment of clients’ most pressing divestment needs… These clients indicated that businesses that profited from civilian weapons, controversial or nuclear weapons, oil sands, thermal coal or tobacco and those that failed to deliver on the UN global compact, should be excluded from sustainable portfolios. Applying this screen to the MSCI World Index saw around 90 companies of 1586 constituents being excluded, only 6.1% of the index’s market cap. “This screen also achieves a carbon emission reduction of 33%, which is quite substantial given that it is just based on a filter,” said Thurner.
Top companies put sustainability first
An example of sustainable investing in action was provided courtesy Robeco, who described their investment case for Finnish-based sustainable energy firm, Neste. “As it turns out, the firm’s climate strategy is very strong compared to competitors, as is its strong innovation focus, which enables it to differentiate from its peers,” said Berkouwer. Having established a competitive advantage, the next step is to quantify the impact of the ESG information on valuation. “In the case of Neste, we increased the longer-term sales growth assumption based on its strong climate strategy and increased the longer-term margin potential based on its superior innovation and management,” he said. The result was a 26% ‘lift’ in the company valuation. An ESG analysis has thus improved the asset manager’s fair value analysis for a share by more than a quarter.
An ESG review of more than 200 companies in the Robeco Sustainable Global Stars Equities portfolio, carried out over the last few years, resulted in valuation adjustments in just over half of the cases, with most of these adjustments being positive. The experience is not surprising given that the fund focuses on quality companies that tend to have a positive sustainability strategies… It also confirms that ESG and quality are closely correlated. “An ESG analysis enables us to improve decision making in terms of whether to buy or sell a particular stock position, concluded Berkouwer. Robeco prides itself on keeping corporate engagement, investment analysis and social impact research capabilities in-house.
Thurner concluded that the asset manager was keen to make sustainability a new standard for index investing, adding that the asset manager’s Screened and Enhanced strategies were priced at the same level. “Exchange Traded Funds (ETFs) are a cost efficient way of investing and will become the benchmark for investing in sustainable opportunities without adding unnecessary cost,” she said.
Writer’s thoughts:
It is not difficult to understand why a client might adopt a ‘return first’ attitude when it comes to investing; but if asset managers’ assertions that you can invest sustainably with better risk and return outcomes are true, it should be a no brainer to go sustainable all the way! Have you seen increased demand from your clients for environment friendly or sustainable investment opportunities; or do they seem not to care? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
