Australasian fund managers and asset owners will inevitably follow the European trend of integrating environmental, social and governance (ESG) factors into the investment process, according to Nicolas Le Clech, BNP Paribas Securities head of product and transformation.
The Sydney-based Le Clech, in NZ last week on client visits, said while there was no single standard definition of ESG adopted by European investors, the issue had gained serious traction in the industry.
For instance, he said about half of all European institutional assets were currently signed up to the United Nations Principles for Responsible Investment (PRI), which sets global standards for ‘ethical’ funds management practice.
“But there are many different ways of applying ESG to portfolios,” Le Clech said. “Sovereign wealth funds, insurance companies, pension funds and so on would all approach it differently.”
At one extreme Swedish pension fund, AP1, for example, applies an overlay assessing each of the companies it invests in on their respective energy efficiency, he said. Meanwhile, Germany’s largest superannuation fund, BVK, puts a lot of weight on social factors, according to Le Clech.
But whether investors choose to implement ESG via negative or positive screens, corporate engagement policies – or all methods – he said they depend on access to high-quality data to base their decisions on.
Le Clech, who shifted from Paris to Australia six months ago, said BNP Paribas found a ready market in Europe for its analytic tool, which rates thousands of securities based on 750 underlying ESG factors.
“Nowadays European investors realise it’s not enough to analyse companies just by country and sector – they need to understand the risk profile of each company across many factors,” he said.
As well as helping to highlight potential short-term controversies, Le Clech said European investors now appreciate ESG analysis also gives insight into “the long-term future” of the companies they own.
BNP Paribas released the ESG analysis system in Australasia earlier this year with at least one large Australian super fund about to adopt it, he said.
“We’ve had a lot of interest,” Le Clech said. “We see [the ESG tool] as one of the major products in Australia and NZ over the next two years.”
Doug Cameron, BNP Paribas NZ chief, said while the survey it conducted earlier this year (in association with Investment News NZ) found the local industry rated ESG as less of a focus than its Australian counterpart, the subject had gained traction here since.
Cameron said while the recent controversy over default KiwiSaver investments highlighted the potential public interest in how fund managers operate, other more long-term factors would drive the NZ industry to further integrate ESG into portfolio management practices.
“Stepping outside of the immediate noise, it’s clear that ESG reporting is an increasingly important topic,” he said.
For example, whether they have explicit ethical mandates or not, all KiwiSaver scheme have to report to investors how they address ESG issues, Cameron said.
He said KiwiSaver providers, including those who use outsourced fund managers, would require better ESG data for both internal reporting purposes as well as supplying information to end investors.
Regardless of any regulatory purpose, Cameron said ESG reporting could also provide all NZ fund managers and asset owners with investment ideas and early-warning signs of any potentially controversial holdings.
Le Clech said younger investors would also push fund managers to broaden their analytical universe, citing a recent survey that found two-thirds of those under 35 wanted their investments to include ESG overlays compared to just 35 per cent for those aged over 35.
BNP Paribas charges on a per portfolio basis for the ESG tool, but with “fixed costs spread across all clients on our global platform”, he said.