Non-financial factors are likely to be integrated into the investment research and portfolio construction processes of institutional investors for “pretty much everybody” over the next five-to-10 years, according to Jens Peers, an expert on the subject. But, for Australian funds, too, there is still a way to go.
Australian super funds rightly pride themselves on being early adopters of ESG principles and being early to the trend to integrate those principles across the decision-making processes in building portfolios.
We have moved far beyond providing ‘ethical’ investment options for members and also moved beyond a ‘negative-screen’ approach to ESG generally. But that is not the case for all funds.
Jens Peers, the Boston-based CIO of sustainable equities and impact investing for Mirova, a European manager within the Natixis Asset Management multi-affiliate group, said in an interview last week, that there was still a lot of debate about how big funds should go about their ESG integration.
He was speaking after attending a conference in Washington organised by Australia’s CIE conference company, which included both Australian and international pension fund investment executives.
“There is more and more evidence that ESG factors can lead to negative consequences, so ESG is still being regarded mainly as a risk management tool,” he said. “As for a provider of returns, given that funds are benchmark orientated, it is more difficult [for general acceptance]. From a portfolio perspective, people are afraid of being sued by members if it doesn’t work out.”
Peers agreed that the weight of academic and empirical evidence was that ESG integration in stock selection both added to returns and reduced risk across a portfolio.
“We strongly believe that pretty much everybody will be integrating ESG factors. It will happen over the next five-10 years. It starts with the ‘G’ (governance) and then, where it is material, it will include ‘E’ (environment) and ‘S’ (social) as well. We want to be ahead of the curve.”
One of the problems for propagating ESG is the common benchmarks, Peers says. For instance, the commonly used MSCI Global indices group all energy stocks together, including oil and gas extraction, and, as another example, the production of solar panels in with the semi-conductor production classification. MSCI does produce separate ESG indices, though, which investors will need to overlay to get a better picture of their whole portfolio’s exposures.
Mirova, which has about 4.8 billion euro (US$5.3 billion) under management and has a private equity and infrastructure arm which are also focused on ESG factors, manages to four major themes:
. Demographic transition, due to ageing populations
. Environmental issues, such as climate change awareness and the depletion of natural resources
. The digital and technological transition impacting on all parts of everyone’s lives, including health care, and
. The role of ethics and governance, such as issues to do with tax evasion by big companies, gender equality, access to clean water and so on.
“These factors will influence, enormously, how we will organize our lives in the future,” Peers says. “And there are lot of sub-themes that help us to identify the investment opportunities.”
With respect to impact investing, which is the active end of the ESG spectrum, involving the development of positively skewed investment projects, such as slum redevelopment and low-income housing, there are different issues for investors.
In Australia, for instance, there is the issue of size, whereby most impact projects are too small for big super funds to get set. Peers said size was an issue in the US and elsewhere as well.
“We started our firm in the impact space and the fund is now 150 million euros. That is sizable for an impact fund but very small in the context of our overall portfolios,” he says.
On the data front, he says there needs to be appropriate benchmarks to allow reportable numbers. “There needs to be data available for every single investment category.”
Mirova also has assets under advice for big funds for ESG issues and provides a shareholder voting service.
Greg Bright is publisher of Investor Strategy News (Australia)