What’s the key to success in sustainable investing?

Mirova’s Head of Sustainability Research, Mathilde Dufour, talks with Citywire about ESG investing in today’s environment.

What do you see as the main challenges to investing in ESG in today’s environment?

Mathilde Dufour: When we look at ESG investing, there has been so much progress over the last years. If you look at today, the end of last year, looking at the number of Article 9 or Article 8 funds, which are under the EU regulations. Funds which have some ESG credentials, they represent over one-third of all the funds distributed in the EU and more than that, it represents two-thirds of the inflows. So, when we look at that, we could say there has been a long way, but that comes with some challenges. For that, we have the regulation, which is going to help through increased transparency requirements, among others.

If we take two of the emblematic regulations which is in Europe, the Green Taxonomy and the SFDR, they will both come with some challenges in terms of these end-financial institutions having to report on the preparation of green investments. So, in terms of challenges, I would say we have been progressing a lot, but at the same time, that means that we have to be accountable more than we did before. That means a lot of progress in terms of quality of the data and ability to really measure the environmental and social impact.

Nisha Long: ESG covers so much ground and the sheer amount of different data out there, which is not aligned, can make analysing the ESG factors quite difficult. So, for example, if you take ESG rating agencies that assess risk, there’s no standard at all there either. So, for somebody like me, researching these, it is very difficult to see-, cut through that noise to find what is the actual impact of those different metrics on a risk basis and to see where the opportunities are also. As Mathilde mentioned, the EU taxonomy, it has helped to bring some sort of standardisation within this process, but it’s still blurred.

What do you think are the key metrics that investors should be mindful of when looking at sustainable offerings?
Mathilde Dufour: I would say that the first thing to look at is really to say-, to answer the question, does the asset manager really state its intention to finance the transition towards a greener economy or a more inclusive society? So intention is still key and that will drive the whole process of the sustainable investment behind. The second question is that if you want to achieve this intention, you need to invest a lot in your workforce, in your expertise, in the methodology. Is there a dedicated team? What are the profiles of this team? What is the methodology and how robust is it are key metrics?

At Mirova, we have dedicated strong resources and a large team since its inception, to make sure that we have the strong expertise of issues. We can go from CO2 measurements to human rights protection to data privacy. And lastly, I would say that having looked at the intention, the resources, you then need to look at the impact measurement, which is a big topic in the industry. Also look at how innovative, how many meaningful, how robust are the impact indicators developed by the asset manager?

Let’s turn to look at the environment in specific and explore the fact that climate mitigation is more urgent now than ever before. Mathilde, how can this play into investors’ portfolios, particularly, if they want to be net zero?
Mathilde Dufour: Looking at carbon neutrality, it’s interesting because it will require actually, achieving this carbon neutrality, the emergence of new business models, new technologies, new solutions, as we saw in the IPCT report, but most of all, it implies the in-depth transformation of companies’ current business models. So that can be choosing some statuses where they can align their business model with the current challenges. We have the B-corp certification, the missions driven companies in France. All these kinds of organisations can also translate into future environmental and social positive impact and ultimately, that would also imply, from a climate perspective, in the end of the process if you’re not managing to properly engage with companies [inaudible 0:12:44] capital flows into companies that are reluctant to climate change.

Nisha, you’ve written a lot about dirty energy’s dominance right now in this sector. What do you think are the main risks and opportunities investors need to be aware of?
Nisha Long: So dirty energy, when I refer to this is oil and coal, which has dominated this year and coal was one of the best performing assets or commodity assets of last year. That’s been due to a number of reasons. One is opening up of the economy after the COVID pandemic, after lockdown and also, supply issues of other energy sources that we’re seeing now. This movement to renewable energy is not as clear-cut as it seems. It may take decades to implement certain infrastructure and see the impact of these investments coming through. Some of the raw materials that go into providing this infrastructure for renewable energy is very expensive at the moment. Again, that’s because of what the COVID pandemic brought with supply chain issues. Not that people don’t want to go into renewable sources, etcetera, but it is quite expensive to go into these at the moment. And, as Mathilde mentioned before, it’s about engagement.

Let’s review the S of E, S and G and talk about the social taxonomy. Obviously, it’s been put in place to define what a social investment is, but what’s your take on the proposal to introduce a common language?
Mathilde Dufour: Definitely, it is of tremendous importance to have the same kind of exercise on the social issue as we had on the environmental ones. It’s estimated that if we want to achieve the UNSDGs and combat a lot of social objectives, we’ll need an additional $3 trillion a year in developing countries. So, the need is here and if we want to direct capital flows to these social objectives, we’ll need at some point, some standardisation. In that sense, having a social taxonomy is definitely a good way to do it. But how to do it, that’s typically the question. If we want to really have a social taxonomy that will work as a tool to direct capital flows towards activities with a truly substantial social contribution, the criteria must be more specific. You have to ask yourself, these jobs, are they respectful of labour rights, are they paid enough, are they sustainable jobs? These types of questions.

On the social side, there is little science, it’s more international values, convention, agreements and there raises the questions on the cross-border factors that you will integrate in the criteria. That’s where the complexity lies. Having said that, it’s still important to have a non-perfect taxonomy, but still try to identify what could be beyond avoiding the negative impact as something that will positively contribute to societal good.

Is it more beneficial to have an imperfect taxonomy than to not have one at all?
Nisha Long: Absolutely. It’s so encouraging to see the social taxonomy and it’s very welcome. I know it’s at the early stages, but I think what I’ve seen so far of it, it can make a good impact on what we’re trying to do. It is so hard to measure a social impact. So, any kind of standardisation in that process would make it a lot easier for us and I think that’s why it has been neglected in the past because there’s no tangible data there that you can measure.
Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices; therefore the universe of investments may be limited and investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. This could have a negative impact on an investor’s overall performance depending on whether such investments are in or out of favor.

Not all affiliated investment managers integrate ESG considerations into decision-making to the same extent. Investors should always review the offering documents on im.natixis.com before investing in any fund or strategy to fully understand the methods and extent an investment manager incorporates ESG factors into their investment and voting decisions.

Mirova is an affiliate of Natixis Investment Managers.
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