Lars Kalbreier
It is a journey. Are we at the beginning, the middle or the end of the journey? I would probably say that we are more towards the beginning than the end.
Viktor Andersson
It is far easier to find companies talking about the benefits of sustainability. The question is finding a fund manager who talks to about it. If you talk to any mainstream portfolio manager, they just say, ‘Yes, well, sustainability is interesting, but I don’t see the added value’. If you talk to Unilever’s Investor Relations people, they can say, ‘This is how much money we are making from sustainability, this is how our sustainability program increases the value of our company’.
Elisa Trovato
Matt, what are the initiatives at European level that push for more transparency in the way companies operate in the sustainability space? Can these initiatives contribute to increase the universe of sustainable stocks and investors’ awareness on this topic?
Matt Christensen
I think a lot of companies do a fair amount already, but what is needed is to help them understand what would be the most useful data to report on and to talk about, beyond what every group is asking. A lot of stakeholders want to have different information, so between questionnaire fatigue and the lack of questions from investors, I think we have two extremes sometimes. If done correctly, the help on the regulatory front would be to provide some ideas on the critical-path information on an obligatory and mandatory basis that companies should report on, so that people can start to compare it. Then you might have a portfolio manager who says, ‘Now that I have a data point, I can compare, across the sector, this aspect of the ESG agenda’, but until there is the ability to do comparisons over time that have relevance, it is hard to find enough where you are comparing oranges.
Viktor Andersson
Of course, it would be helpful, but changing the way portfolio managers work is not just providing them with the data. The main conundrum for ESG integration is that, in general, a portfolio manager has the investment model that they believe is the best. They take the factors that they believe are the most relevant to come up with a fair price; otherwise, they would take other factors. Coming in from the side – which is what ESG often is – and convincing the portfolio manager, ‘Actually, you have not been looking at all the relevant factors. You forgot these three’, is a challenge. To say the least.
Matt Christensen
If companies had to report, however, on more comparable criteria, it might be easier to see the relevance of the data.
Viktor Andersson
It would help the believers, but I do not think that you would convert the non-believers.
Matt Christensen
Until they saw that it mattered, I agree, but if, over time, those models showed that it mattered, they could be converted.
Viktor Andersson
Interestingly, a couple of emerging-market stock exchanges are leading developed-market stock exchanges in terms of implementing listing criteria requiring disclosure of ESG information.
Elisa Trovato
The reputational risks of poor ethical standards are obvious but do you believe that the impact of the positive attributes are harder to quantify?
Joost Bergsma
The positives, I agree, are difficult to measure transparently. In terms of the negatives, you can see what happened to BP. If you do not comply, there are significant negative consequences that could be relatively long-lasting. That stick approach, as opposed to a carrot approach, does help companies to drive forward in terms of being more compliant and being leaders as opposed to laggards, or just ticking boxes.
Elisa Trovato
What are the key growth drivers for sustainable investing, and what are the barriers to overcome?
Viktor Andersson
Clients expect asset owners and asset managers to start integrating ESG into all asset classes. Five years ago the leaders were already well ahead in terms of global, large-cap equities. Now, they are looking into emerging markets, fixed income and alternative investments, and that is what is driving the growth currently. Investors cannot, year after year, report that they are working on (the same) global large-caps. They have to show progress, that they are going down in market-cap size and expanding into other markets and asset classes. I would say that that is the main driver.
The main barrier for doing this properly is that a lot of ESG teams are still separate from the portfolio management process. In many companies, ESG teams are a separate team sitting in separate room, far from the actual investments, providing the portfolio manager with an investible universe with which to work with, and that’s it. At the same time, the portfolio manager is doing something else with the mainstream portfolio, which is much larger, so they pay more attention to that. That is also why SRI might in some cases underperform: because it does not get the attention that the mainstream portfolio gets.
