Environmental, Social, Governance (ESG) principles have demanded attention from both institutional and retail investors for the better part of a decade. Because ESG is an amalgam of abstract concepts, investors continue to grapple with how to apply them and quantify their results. Three prominent asset managers share their visions on the practical application of the principles during a seminar in the second week of May:
According to portfolio specialist Harry Boyle of Impax AM, considering the net impact of an investment rather than the carbon footprint may be a more holistic approach. Some companies may produce a product that requires ample resources to produce, but saves them over the course of its existence (take for example insulation). In this respect, assessing a carbon footprint is simply not comprehensive.
Maslow’s hierarchy of needs is a good starting point when assessing the social principle. Simon Bond, Director of Responsible Investment Portfolio Management at Columbia Threadneedle Investments believes that any corporate bond could be a social bond if the target is explicitly given. Emphasis should be placed on vulnerable people – those struggling to fulfil the basic needs found at the bottom of Maslow’s pyramid. Why use bonds to achieve social outcomes? They are a conventional asset class and they offer a more targeted social investment opportunity by partnering with entities that do not trade public equity. Bond advises to “define criteria and measure yourself continually against it. Hold the company accountable. An incentive-based approach helps companies know that if they don’t make the mark, their bond will be sold and they will find a company that does make it.”
Hans Stegeman, Head of Research and Investment Strategy at Triodos believes that governance begins with company selection. Unlike other asset managers, Triodos doesn’t believe that the Sustainable Develoment Goals (SDG’s) are the solution. Stegeman: “of course there is a link, but we start the other way around, first we identify what is important and then we see how it can link to the SDGs”.
Furthermore, Triodos has an engagement plan for every company in which they invest. “We only do SRI/ESG so there is no plan B, and that helps to be taken seriously,” says Stegeman. He lists practical case studies such as Vestas (conflict minerals) and Carrefour (farm animal welfare) and raises the issue of data privacy – is GDPR good enough? “Policies are not enough – on paper they look good, but in practice, they are not effective. Of all of the companies that we have assessed, those with the biggest problems had excellent policies.”
Exclusion or engagement
When all three professionals were confronted with choosing either exclusion or engagement, there was clear consensus: engagement is now deemed much more important than exclusion. As Boyle points out, “it was incredibly important in the beginning of the SI movement. But now we have evolved. It is has served its purpose.” Perhaps 20 years in the future, investors will view 2018 as the year that ESG became mainstream and engagement became the ‘best practice’. Regardless of what new catalysts emerge in the ESG arena by 2038, practicality will remain imperative.