Despite its growing popularity, challenges remain and there is a genuine threat that investors lose heart amid growing signs of greenwashing, complicated regulatory upgrades, and less than stellar returns. As the market and motivations continue to mature, should investors be more optimistic for the future of sustainable investing?
“Sustainability is now mainstream and that is totally new,” said Lea Dunand-Chatelet, portfolio manager and head of responsible investment at Paris-based DNCA Investments. “What is going to be the challenge is graduation.”
Lea was speaking at a sustainable investing panel during the recent Natixis Thought Leadership Summit in Paris, where she explained how the challenge was now moving beyond simply introducing – and justifying – the concept of sustainable investment.
Instead, the conversation is becoming more sophisticated. Lea continued: “The reality is you have different types of investments and you have to compete with that – you can have products that do not have any ESG integration, and then those that make a real impact. There is a wide space between these.”
This is evident in the way ESG is being interpreted, and integrated, differently throughout the asset management industry. It has also coincided with a broader range of issues coming to prominence which fellow panellist, Karen Kharmandarian, CIO at Thematics Asset Management, believes adds another layer of complexity for investors.
“We have a broader scope of issues that are targeted in the environmental space and on the social side we are also seeing that evolution as well,” said Karen. “The goalposts are always moving, and rapidly moving. The most important thing is we do not lose sight of the duty to our clients.”
Speaking at another panel discussion on equities during the event, Soliane Varlet, SRI equity portfolio manager at Mirova, discussed how her team was using these issues to identify financial outperformers. Specifically, Soliane explained how gender diversity could dictate equity research and stock selection for portfolios.
“The fact is companies with a more diverse team tend to be much more economically profitable,” she said. “To identify the company as a gender diversity champion, we focus first on top management because there is a sphere of effect. A woman CEO is more likely to have women running business units.”
Karen’s point about keeping the client in mind was at the forefront of our panellists’ concerns. While the industry has been quick to adapt to new client demands for sustainability, this has nonetheless been a challenge to deliver in some portfolios.
Giving her personal insights on this area, Nathalie Wallace, Global Head of Sustainability at Natixis Investment Managers, explained that her team instead try to find the commonalities within a given investor segment.
Using the example of institutional clients, Nathalie commented: “Insurance companies around the world face exactly the same issue. This is what's called either climate transition or adaptation, meaning their liabilities will be impaired by the physical impact of climate change.
“We are here to serve the clients that are actually forcefully thinking about what the future is going to be like. It might be different for different clients.”
For retail investors, there are often more personal intricacies to navigate. As Nathalie explained, the challenge for asset managers is in integrating both non-financial ESG metrics and financial considerations material to an individual’s perspective.
“Retail clients around the world have the same issues, and they look at the world in a similar way, which is, yes, I want to contribute to this transforming one, but they also want to retire,” said Nathalie. “We’re not a charity. We are an investment management company, and our objective is to deliver on both objectives.”
Although sustainable investing may no longer be a niche endeavour, existing and fresh challenges abound – not least the introduction of new, and continuously updated, regulations. This may come at a significant cost for firms.
Yet, according to Nathalie, this is simply a fact of life going forward – the best strategy may therefore be to simply ignore the noise. “We're long-term investors, and we're here to help our clients and the clients of our clients to retire, to be prosperous, to finance their next life projects,” she said.
Nathalie added that asset managers must embrace change, not resist it: “It is extremely important to the part of the change makers’ community and not be a change taker.”
Of course, recognising shifting long-term trends is one thing. Being able to accurately quantify them and report on them is quite another. As Lea pointed out, where sustainability issues and data was once a problem of scarcity, ESG’s rise in popularity has flipped the issue on its head and investors now have to anticipate an abundance of concerns.
She explained: “20 years ago, less than one company in 10 in Europe was delivering 10 pages about sustainable development in their annual reports. Now, most of the pages are linked to this. This is too much.”
The profusion of sustainability collateral means there’s a challenge in simply sifting through the noise, rather than pressuring companies to publicise anything. Lea added: “We need figures and raw data. Trust of the data will be key in the next few years. Standardisation is the first step and regulation is starting to give us that.”
Despite these obstacles, the panellists agreed that the extra work was worth it. The signs of long-term change are inevitable and most want their portfolios aligned with the future, so they can benefit from the transitions.
Soliane concluded: “We want to allocate capital towards companies that will finance the environmental and social transition. The ESG metrics are key to assessing sustainable opportunities, but also to better understanding the risks for a company.”
DNCA, Thematics and Mirova are all affiliates of Natixis Investment Managers, and form part of our Expert Collective.
- Energy transition – the transformation of the global energy sector from fossil-based systems of energy production and consumption to renewable energy sources. Switching from non-renewable energy sources like oil, natural gas, and coal to renewable energy, such as wind or solar, is made possible by technological advancements and a societal push toward sustainability.
- ESG – (environmental, social, governance) is widely used in the investment industry to describe three types of non-financial factors that may affect the financial performance of a company or a security:
- Environmental may include factors related to renewable energy, lower carbon emissions, water management, pollution control and other ecological concerns.
- Social considerations may relate to labour practices, human rights, corporate social responsibility, data protection, selling practices or corporate supply chains.
- Governance issues can include the composition of boards of directors, corruption policies, auditing structure, executive pay or shareholder rights.
- ESG integration – refers to strategies that integrate ESG factors into fundamental analysis to pursue alpha and manage risk, or may use sustainable themes to identify investment opportunities. Certain ESG strategies may also seek to exclude specific types of investments.
- EU Taxonomy – is a classification system, establishing a list of environmentally sustainable economic activities. The taxonomy provides companies, investors, and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable.