Despite its growing popularity, challenges remain and there is a genuine threat that investors could 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?
At a recent Natixis Thought Leadership Summit held in Paris, experts in their field discussed their thoughts on the future for sustainable investing.
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 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 moving rapidly. 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 were 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 the 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.”
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,” she said.
Nathalie added that asset managers must embrace change, not resist it: “It is extremely important to be part of the change makers’ community and not be a change taker.”
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.
- 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.