Measuring ESG’s true success

By being proactive, rather than reactive, sustainable investing has come of age during the pandemic. But how can investors and advisers differentiate between leading and lagging asset management businesses?

Mirza Baig, global head of ESG corporate research, Aviva Investors

While ESG is changing the face of asset management, the array of differing approaches and terminologies can make life confusing for investors looking for best in class solutions for their clients.

In terms of fund approaches, ESG integration is the base level offering for many asset managers. But approaches can be highly divergent. As Mirza Baig, global head of ESG corporate research and active ownership at Aviva Investors, points out, it’s important to look under the hood to understand who is doing proper integration.

Four building blocks are particularly relevant, he notes: ESG research and insight generation; the way these insights are disseminated across the firm; the systematic integration of ESG research into the investment process; and finally, the monitoring and challenge process.

Engagements provide an insight into the forward-looking prospects of a business that can’t be found in standardised disclosures

Active ownership is another area of ESG that is important for advisers to scrutinise. The benefits of a robust stewardship approach are two-fold. ‘Engagements provide an insight into the forward-looking prospects of a business that can’t be found in standardised disclosures,’ Baig points out.

In addition, he notes, targeted and impactful engagement allows an investment manager to partner with companies as they go through their transition journey and ultimately to benefit from the growth in returns and multiple expansion that should go with it.

Excluding certain investments from a portfolio is another widely-implemented approach, but here again there are things to watch out for.

Marte Borhaug, global head of sustainable outcomes at Aviva Investors, outlines four broad bases for exclusions: ‘The first is values, such as personal ethics or religious views; the second is a focus on international norms, such as the UN Human Rights Declaration; the third is poor sustainability practices, and the fourth is those companies that score badly on ESG metrics,’ she says.

But there are potential hidden risks in these exclusion approaches, she notes.

A company can have a good ESG score but actually end up having bad practices that get spotted. 

‘A company can have a good ESG score but actually end up having bad practices that get spotted. A recent example was Boohoo, which was included in a lot of sustainable portfolios because they had a fairly good ESG score from key data providers, but it turned out that there were poor practices hiding behind the score ,’ Borhaug says.

Another example of hidden risk could be excluding fossil fuel companies, only to find that investing in a bank stock leads to exposure to those companies via the bank’s lending.

Perhaps the most focused approach of all is impact investing. But here again, advisers need to be clear. ‘There are key things that must be established for a good impact approach. There needs to be a particular impact goal, and a clear sense of the stakeholders around the world that benefit from the strategy. You need to be able to measure how much impact the strategy has had. What’s the depth, what’s the scale and what’s the duration? And finally, how much contribution has this particular approach made to the planet’s wellbeing, called additionality?’ she says.  

Three questions with Kunal Oak, Head of Product Strategy & Solutions, Aviva Investors

Will there be scrutiny on funds that simply base ESG investment decisions on rating agency scores?

ESG ratings or scores, from data providers or created by managers themselves, are very valuable tools, however they are only one indicator of an asset’s ESG attributes. Such data is often backward looking and static therefore it is important to understand how qualitative research is overlayed on the data to generate deeper and higher quality insights. Alongside scrutiny on the approach ESG insights, there will also be scrutiny on how these insights are made visible to investment decision makers and their contribution to investment decisions evidenced. 

I’m all for improving the planet, it’s been a concern of mine for a while, my concern though, is how I fit into all this as an adviser. I’m not qualified to assess the finite stock of funds, to me, this has to be dealt with at a very high level, possibly on each and every fund.

It is a challenging arena due to the amorphous nature of ESG with many different approaches and terms. Understanding the outcomes a client is seeking, and within this the ESG component, and mapping these to the outcomes offered by different products has to be the starting point. In this respect, incoming regulation in Europe, which will be transposed in some shape or form in the UK, will provide much needed structure for all market participants.  In addition ESG fund ratings are developing, looking at managers’ commitment at firm level as well as at funds themselves.

Is it the case that while companies directly involved with dangerous and damaging practices are affecting the planet, investor companies such as pensions and wealth managers are also accountable for financially supporting these organisations?

Providing financial support to a company comes with a duty to hold it accountable for its practices. Many asset owners will hold legacy positions in companies that could be construed as being involved in damaging practices, depending on how you define this. What is important to consider is what you do with your voice as an investor, working with your asset management partners, to affect positive change in these companies though engagement. If this doesn’t have the desired outcome after a given period of time then divestment should be considered.  If you’re invested but seeking change you’re part of the solution, but not if you stay silent.

This article first appeared in Citywire NMA.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature.

Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future.

The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

ESG Know How

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