STEWARDSHIP and engagement are the key elements to integrating environmental, social, and governance (ESG) factors into the investment process to achieve sustainable investing.
Although there is no perfect definition, for investors and asset managers, ESG integration basically means making sure the companies they invest in go on a virtuous path towards environmental, social, and governance issues with the expectation that over time, these would have a positive impact on the share price.
Engagement basically means the capability of an asset manager to become involved with the management of companies they invest in and push them in the right direction in terms of ESG integration.
Stewardship, on the other hand, has more to do with the overall governance of the company at the board level to ensure ESG integration.
In terms of stewardship, one of the things worth looking at from an investor perspective is the percentage of votes by asset managers on the issue of climate risk. This is usually measured by an external body which makes it a concrete way of measuring stewardship.
Since sustainability investing is still at an early stage in Asia, investors and asset managers need to identify companies that are interested in ESG although they may not yet be fully ESG-integrated.
“Integrating sustainable investment into our underlying strategies enables us to identify and work with companies that may rank lower from an ESG standpoint but they understand that they need to change. Ultimately, this will lead to better risk-adjusted return from an ESG perspective,” says Sandro Pierri, global head of Client Group at BNP Paribas Asset Management (BNPP AM).
The focus on ESG integration is also part of a bigger trend towards more demand for a solutions-based asset allocation approach versus the more traditional product-based approach.
“Clients are increasingly interested to discuss more about solutions. Increasingly the approach for asset managers has been sitting down with clients, understanding their concerns and problems and trying to find the right solutions,” Pierri says.
As part of its ESG integration process BNPP AM, in 2006, became one of the early signatories to the Principles for Responsible Investing (PRI), a United Nations-supported network of investors seeking to promote ESG investing.
Since then BNPP AM has integrated 100% of its flagship investment strategies into ESG and has a commitment to integrate all of its strategies by 2020.
“We are doing that because we are convinced that ESG integration is adding financially-material consideration to the investment decision-making process which would help improve the overall performance of our clients’ portfolios,” Pierri says.
The differentiating element for BNPP AM is that it started its ESG integration process by creating a global sustainability centre, housing ESG research and stewardship activities. This centre now has 25 people focused solely on sustainability.
Through the centre BNPP AM has identified its own criteria for ESG investing and built its own ESG scores which is another element that goes into ESG investing.
By generating their own ESG research, data, and scores, BNPP AM is able to push its portfolio managers to engage with companies that may not yet be fully ESG-integrated.
“One thing that we ask of our portfolio managers is to make sure that they engage with companies that may rank lower from an ESG perspective,” Pierri explains. “For example, while the managers still invest in these companies, part of the investment strategy is to keep engaging with the companies in order to address their ESG practices and encourage improvement.”
At present, there is a bigger emphasis on the environmental aspect of ESG especially on climate change. However, investors and asset managers have realized that the social and governance elements are equally important as well.
Governance is particularly important because it has a lot to do about the capability of a company to have the right framework for a proper check and balance in the decision-making process.
The social element is also key in terms of having proper gender diversity, ensuring the welfare of employees, and providing equal opportunities especially for people with disability.
Another key element in ESG integration is anticipating future trends which may create disruption as well as investment opportunities or investment risk.
“Climate change is clearly one of the biggest risks but it also provides opportunities because the transition to different sources of energy is happening and will most probably accelerate. This represents a key investment opportunity and is the basis why we have created and launched in September 2019 an energy transition fund,” Pierri says.
The energy transition fund will invest in companies that will have a significant positive impact on energy transition in terms of technology, storage of renewable energy, etc.
“We feel that the focus on sustainability is not only on integration but also on incorporating the ESG criteria into our long-term investment decisions. This is increasingly important so there’s going to be disruption because of that. As investors, if we are able to identify those opportunities for our clients, it will ultimately benefit the clients’ portfolios. Our energy transition strategy is a good example of that,” Pierri says.